What Is an Asset Protection Trust?

Trusts are a very versatile tool in estate planning. They can be deployed to avoid the probate process, keep an estate’s total value within the federal estate tax exemption, and protect a child’s inheritance from their spending habits. Trusts are more complex and offer a greater array of possibilities than other estate planning tools, such as a will, which is similarly used to determine who inherits what but not to the same degree of customizability and specificity.

Among the many different trust archetypes that exist, one is often used to safeguard assets and keep them out of the grasp of creditors and lawsuits – the asset protection trust (APT). The trust is built in such a way that any property or assets signed into it are no longer technically under your control or ownership, but belong to an altogether different legal entity under the management of yourself and someone you trust. By permanently separating yourself from these assets, you lose some privileges and access but still retain the ability to pass them onto specified beneficiaries.

Understanding Trusts

All trusts exist as an entity created through a legal agreement between three parties -the grantor (you), the trustee (your managing partner or close friend), and the beneficiary (or several beneficiaries). Trusts can be as large or as small as you need them to be, and their cost will depend on how complex they are, and what kind of scope they have.

Some trusts last until only a few years after a grantor’s death, at which point they will have been completely dissolved. Some trusts are designed to continue managing a grantor’s assets for decades after they have passed away – such trusts are more costly. When designing a trust, it is important to be completely aware of several terms and definitions.

Funding a Trust

Firstly, trusts must be funded. To do so, all assets and properties put under the ownership of a trust must also be aptly renamed to belong to the said trust. For example, you would have to amend the title on your home to indicate that it is part of a trust, rather than your own properly.

Irrevocable Trust and Revocable Trust

Trusts are either revocable or irrevocable, both of which come with their own set of rules. Irrevocable trusts are much harder to amend and are designed to never be changed. Asset protection trusts must be irrevocable.

Revocable trusts can be amended and reversed, but still count as part of your estate. These trusts still provide a series of other benefits, such as bypassing the probate process and allowing you to be more specific about how you would like your assets to be distributed upon death.

Fiduciary Relationship

Trustees have a legal responsibility to uphold the interests of a trust’s beneficiaries. This makes a trust a fiduciary relationship.

Living Trust or Testamentary Trust

Living trusts are created and signed while the grantor is still alive and go into effect immediately. When a grantor signs an irrevocable living trust for asset protection, their assets are no longer part of their estate, even if they have not passed away yet. Testamentary trusts only truly go into effect once the grantor has passed away, and the successor trustee takes over.

Asset Protection Trusts Are Irrevocable

To legally protect an asset from a creditor, lawsuit, or other forms of asset seizure, it must be distinctly separated from the individual in question. As such, asset protection trusts are designed to effectively (and permanently) place assets and property of your choosing within a safe legal vault.

An important note: while an asset protection trust separates you from your property, you can legally be both the grantor and the beneficiary of a trust. This is called a self-settled trust. As such, depending on the specifics in your area, you can benefit from an asset protection trust by safeguarding your assets for a determined period, and then retrieving them.

The language and specifics around doing something like this are very delicate. You must know exactly what you want to achieve with an asset protection trust because it is not a trust that can be easily revoked or amended. Therefore, it is always critical to hire an estate planning professional for a trust like this. There are no template documents that can provide you with the kind of protection you will want with this type of trust.

Asset Protection Trust Types

An asset protection trust can be further broken down into two distinct types: domestic and foreign. Domestic trusts are currently permitted in 17 states, namely:

      • Alaska
      • Delaware
      • Hawaii
      • Michigan
      • Mississippi
      • Missouri
      • Nevada
      • New Hampshire
      • Ohio
      • Oklahoma
      • Rhode Island
      • South Dakota
      • Tennessee
      • Utah
      • Virginia
      • West Virginia
      • Wyoming

This list may expand or change over the years, so always be sure to consult with a local professional to see whether a domestic asset protection trust is possible within your jurisdiction.

While a domestic asset protection trust is viable and performs as it should, it is not as safe as the alternative. Their major drawback is that they are still subject to United States jurisdiction, and as such, can be overridden by specific court orders, judgments, and certain state laws.

A foreign or offshore asset protection trust offers an additional layer of protection because it exists outside of the US, offering more privacy, and a wider array of protections against judgments and lawsuits/bankruptcies. These benefits are offset by a higher overall cost.

Is an Asset Protection Trust Right for You?

Certain professions are more likely to face litigation than others, and if you happen to work in a field where you may be faced with a lawsuit or two, preparing to set up an asset protection trust may be a good idea simply as insurance, should anything happen. Corporate executives and medical professionals often set up these trusts to avoid losing key assets due to lawsuits.

However, even if you are not at risk of being hounded by lawsuits or creditors, it does pay to look into certain protections for key assets. Divorce proceedings, civil suits, and bankruptcy are just some examples of cases where asset protection can help you ensure that specific key properties and accounts are kept safe.

There are also federal and state laws that protect specific assets from lawsuits and seizure under specific circumstances, including homes, life insurance, and retirement accounts. Consult with a local estate planning lawyer about your options and concerns regarding asset protection before you make any decisions.


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