What is an Asset Protection Trust

An asset protection trust is a type of trust that holds assets in order to shield them from potential creditors. Furthermore, this account is the best financial tool to protect finances from lawsuits, creditors, or judgements against an estate. Because of this, an asset protection trust can even act as a deterrent. The reason for this is if the plaintiff knows that your most valuable property is in this type of account, bringing forth a lawsuit will offer little benefit.

Under this account, the grantor—the person funding the trust—is also a beneficiary that has access to the funds within the trust. If the grantor creates the trust correctly, the grantor will be able to receive funds from the trust, yet creditors and lawsuits will not be able to touch the assets. However, to receive funds from the trust, an independent trustee to the trust must make these distributions to the grantor. Finally, if the grantor creates a domestic asset protection trust, the trust also offers state income tax benefits.

Funding an Asset Protection Trust

When funding an asset protection trust, it is extremely important that you consult a number of professionals such as lawyers, financial planners, and insurance brokers. The reason why you need to involve so many people in this process is so that you understand how creating this account will effect legal protection, taxation, business and growth potential, and future trust distributions to beneficiaries. In most cases, a grantor will fund an asset protection trust with real estate, recreational assets such as cars or boats, cash, securities, and businesses or business assets.

Domestic Asset Protection Trust

A domestic asset protection trust is an irrevocable trust that offers a flexible way to safeguard property in the United States. Though this account is flexible, currently, only 17 states allow the use of this financial tool. These states include: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. In recent years, the number of states that allow residents to use these trusts has significantly increased. As more states continue to see the value this trust holds, adoption should continue to increase in the future.

It is less costly to create a domestic asset protection trust compared to a foreign asset protection trust. However, the risk of saving money by using a domestic asset protection trust is that the assets still reside in the U.S. legal system. This fact puts the assets at the risk of court orders for judgments such as liens, federal bankruptcy laws, or even certain state laws.

Additionally, because these types of trusts are new, the case law surrounding these accounts is still developing. This constant development can be problematic. The reason for this is that you may believe that your trust protects all of your assets. However, a future court ruling may put these assets at risk. Finally, in most states, there is a time period where creditors can easily access assets that the grantor places into the trust after the trust is first created.

Foreign Asset Protection Trust

Foreign asset protection trusts—commonly referred to as offshore trusts—is a type of trust where assets are held in accounts established outside of U.S. jurisdiction. Common areas where these accounts are set up include the Cook Islands and the British Virgin Islands. Foreign asset protection accounts are more expensive than their domestic counterparts. However, these accounts have more stringent privacy measures and as such, offer more effective protection for assets. Additionally, these accounts do not usually enforce U.S. judgements against assets. This means that if your assets are in one of these offshore accounts and a lawsuit is brought against you that requests your assets, the assets will not be made available. The one potential issue with foreign asset protection trusts is that the assets in the trust are at risk of any political or economical issues that occur in the host country.

Medicaid Asset Protection Trust

An asset protection trust is normally set up to protect property from creditors. However, this same strategy can be effective to make someone eligible for Medicaid benefits. By reducing the assets in your name, you can receive government benefits. Furthermore, you can still have a trustee on the account disburse payments to you as you require. Before you create an asset protection trust in order to achieve the goal of getting government benefits, it is important that you consult a trust administration attorney to ensure that you can actually receive this benefit.

Pros and Cons of Asset Protection Trusts

Creating an asset protection trust—whether domestic or foreign—protects assets from creditors and lawsuits. It does so as well as or better then any other legal method in the U.S. Thus, if you run a small business, it may make sense to place some of your assets in this type of trust. This is extremely useful if you have a storefront or retail space. Doing so protects you against personal injury lawsuits brought against you. Additionally, setting up an asset protection trust where you name other beneficiaries besides yourself is useful. Having a trust will help your heirs avoid the costly and time-consuming probate process.

The main drawback associated with an asset protection trust is that the trust is irrevocable. If a trust is irrevocable, it cannot be modified or revoked in any way after it is initially established. This can complicate the estate planning process. You cannot change your mind about which assets you wish to include in the trust. Finally, an asset protection trust offers many benefits. However, there is a high initial cost to set up this trust because of the professional opinions required.

Final Thoughts

Trust and estate laws are complex. This is so no matter the type of trust you decide to establish. As such, it is extremely important to have legal representation that can help you correctly set up your trust. The Antonoplos & Associates estate lawyers have over 20 years of experience helping clients estate planning. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust. Furthermore, Peter Antonoplos, founder and managing partner of Antonoplos & Associates has an LLM in Taxation from Georgetown University Law Center. With this knowledge, Peter can help maximize the cost savings you receive from setting up an estate plan.

Contact our DC Law Office for More Information

Finally, for more information regarding estate planning, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.