Many people make an estate plan to preserve their legacy and provide for their loved ones in the future. So how can you guard against creditors claiming a slice of your estate? If you’re concerned about protecting your property from lawsuits and creditors, an asset protection trust might well be the answer.
In this guide, we’ll break down how to protect assets in a trust. We’ll also explore different types of asset protection trust, the pros and cons, and how to set one up.
An asset protection trust, or APT, is a financial vehicle designed to shelter your property from creditors. It works by transferring ownership of your assets into the trust, which is managed by a trustee—just like with any other type of trust. With an asset protection trust, however, the grantor (the person who creates the trust) can also be named as a beneficiary. So while your wealth is no longer legally yours, and therefore can’t be touched by your creditors, you’ll still be able to benefit from the assets in the trust account.
An asset protection trust is an irrevocable trust, which means that once it’s set up it can’t be amended or revoked (unless in rare and exceptional circumstances, and with the approval of the trustees, beneficiaries and the courts). It’s also generally a self-settled trust, meaning that the grantor can also be named as the beneficiary. Within this, there are two main types of asset protection trust: domestic and foreign.
A domestic asset protection trust is one that’s based in the United States. You can’t establish an asset protection trust in every state, but they’re allowed in an increasing number of states, including Alaska, Delaware and Nevada.
This type of trust is relatively simple to set up, but it’s important to note that domestic asset protection trusts are not as established as their foreign counterparts. This means that while they’re increasingly recognized by courts around the country, there’s still a way to go in terms of building up the case law. As a result, domestic asset protection trusts are sometimes still challenged by creditors in the United States.
As their name suggests, foreign asset protection trusts are established outside of the United States, and are also known as offshore trusts. When you set up an offshore trust in a foreign jurisdiction such as Belize, Cyprus, or the Cook Islands, the trustee must be a resident of that country.
Establishing this type of trust is a more complex and costly process than creating a domestic asset protection trust, but also offers a higher degree of protection. That’s because it’s governed by the legal system of the country where it was set up—so even if a creditor wins a judgment against you in the United States, it won’t be enforced by the courts in a foreign country.
The case for setting up an asset protection trust as part of your estate planning can be compelling. However, these trusts can be complex and they require careful consideration. Let’s take a closer look at the pros and cons.
Pros:
The main benefit of creating an asset protection trust is to shield your assets from creditors and legal judgements. When you transfer your wealth into this type of trust, the trust becomes the legal owner of your property and you relinquish control of your assets to the trustee. In doing so, you put your assets beyond the reach of creditors, liens, and lawsuits.
Both domestic and foreign asset protection trusts offer compelling benefits when it comes to estate planning. By sheltering your assets from creditors and legal judgements, you can preserve the value of your estate for your heirs.
There can be tax advantages too. If you establish a domestic trust in a state like Alaska where there is no income tax, the trust won’t be liable for state taxes. Foreign asset protection trusts potentially offer even stronger benefits in terms of tax planning, although you’ll still have to continue to pay income and estate tax.
Protecting your estate includes protecting it from prying eyes. An asset protection trust is like any other trust in that it doesn’t need to go through probate; unlike a will, it’s not a matter of public record. A foreign asset protection trust potentially offers an even greater level of privacy, depending on the laws in the jurisdiction that you choose.
Creditors and lawsuits are not the only perils that lie in wait. Sometimes the greatest threat to your estate is its beneficiaries. Nobody wants to spend a lifetime building up their legacy, only for the next generation to let it slip through their fingers due to unforeseen problems such as debt or divorce.
A lifetime asset protection trust (LAPT) protects your property by putting it into a trust instead of handing it over to your beneficiaries directly. That way, you can future-proof their inheritance from poor decisions. For example, any assets held in a trust are not considered marital property, so they can’t be included in a settlement in the event of divorce.
Not to mention, these trusts can also protect you from your own poor decisions. A self-settled trust allows you to benefit from your assets while keeping them away from creditors.
Trusts of all kinds feature in estate planning. By bypassing the probate process, trusts can facilitate the orderly transfer of wealth to future generations, and asset protection trusts are particularly effective. ATPs not only reduce the risk of creditor claims eating into the overall value of the estate, but also speed up the estate administration process by mitigating the threat of long-running litigation to allow for a streamlined handover of property.
Cons:
While asset protection trusts preserve the value of your estate by shielding it from creditors, you do have to balance this with the cost of setting up the trust in the first place. You will have to pay a one-time set-up fee (which can range from a few thousand dollars for a domestic trust to 10 times that for an offshore trust), and also have to factor in the annual maintenance costs.
Asset protection trusts can be governed by strict legal requirements, depending on the jurisdiction. For example, you might have to set up a company in order to create a foreign asset protection trust in another country. It’s also important to remember that you can only use a trust to guard against unforeseen future claims. There are regulations in place to prevent the use of trusts for fraudulent transfers—when debtors attempt to hide their assets from creditors who are already owed money.
An asset protection trust allows you to act as both grantor and beneficiary, but not as the trustee. It’s important to recognize that setting up this kind of trust does limit your control over the assets in the trust account; ultimately, the responsibility for managing them, and all decision making, will rest with the third-party trustee.
While foreign asset protection trusts are well established, domestic trusts are still quite new and are relatively untested in the courts. Bear in mind that some asset protection trusts may not be recognized in all jurisdictions, and your estate may still be subject to creditor claims and lawsuits by the courts in some states.
If you’re considering setting up an asset protection trust as part of your estate plan, here’s how to go about it:
There are several different types of asset protection trust, each designed for a particular purpose. Think about your objectives to help determine which one is best for you. Foreign asset protection trusts are generally more expensive than domestic trusts, but if privacy is your main concern then this might be the one to choose.
When deciding where to base your trust, take a close look at the regulations in each of the states or countries you’re considering. In the United States, a handful of states including Nevada, Alaska and Utah are considered to be the most favorable towards asset protection. Nevada, for example, has a shorter statute of limitations than most other states, giving new creditors a shorter window in which to make a claim.
Similarly, foreign jurisdictions can vary widely when it comes to the regulations surrounding asset protection trusts. The Cook Islands, the Cayman Islands, and Saint Kitts and Nevis are all popular choices. However, laws both in the United States and abroad are subject to change, so it’s important to stay up to date with evolving regulation that might affect your trust.
Asset protection trusts are irrevocable, which means that you can’t change your mind after you have set one up. So it’s important to create a trust document with clear terms and conditions that accurately reflect your wishes. Foreign asset protection can be particularly complex, so it’s a good idea to consult a professional attorney to make sure that the document is watertight.
As with any other trust, you can transfer a variety of different assets into an asset protection trust. These might include real-estate property, stocks and shares, valuables and personal property, as well as cash funds. It’s crucial to make sure that everything is properly retitled so that the trust becomes the new owner; failure to do so leaves your assets vulnerable to creditors.
Once you’ve created your trust, there’s no going back. By putting your property into an asset protection trust, you relinquish all control over how this property is managed. It’s therefore crucial to appoint someone you can rely on to administer the trust properly. The trustee might be an individual, or an organization such as a bank or legal practice. Either way, they’ll need to be based in the jurisdiction where your trust is established.
No, they’re not. Here is the current list of trust-friendly U.S. states, according to the American Bar Association:
An asset protection trust can have a big impact on your estate planning. By protecting your estate from future claims, this type of trust preserves the overall value of your estate. While we can’t predict the future, an asset protection trust reduces some worry of the unknown, giving you and your loved ones greater peace of mind.
While an asset protection trust can be complex to set up and manage, it can streamline both trust and estate administration in the longer term. That’s because asset protection trusts bypass the lengthy probate process and reduce the risk of creditor claims and lawsuits, both of which can lengthen the estate administration process. However, it’s wise to engage a professional attorney with experience in this field, and who uses trust accounting software, to ensure accuracy and regulatory compliance.
Anyone who is making their estate plan and is concerned about protecting their assets from creditors should consider setting up an asset protection trust. This type of trust is particularly popular with professionals who work in areas that put them at risk of lawsuits, such as law or medicine, as well as wealthy individuals looking to preserve as much of their property as possible for future generations.
As we’ve seen, asset protection trusts can be an effective way to preserve your legacy, as well as streamlining the estate administration process further down the line. However, there are strict rules governing these trusts, and it’s best to engage a trust and estates professional who not only understands the complexities, but is also equipped with cutting-edge trust accounting software.
At Estateably, we’re simplifying the way attorneys tackle trust administration. Our powerful trust accounting software makes it easy to reconcile accounts, generate reports, and stay compliant with regulations—even when they change. Speak to our expert team or schedule a free demo to see how our platform can power your practice.
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