Asset Protection Trust: What It Is, Its Types, and Which One is Right for You

Last Updated on December 27, 2022 by Selina Parker

If you’re like most people, you have worked hard to amass your wealth. You’ve probably got a lovely home, a few cars, and even some investments. But what would happen if something happened to you? Who would inherit your estate?

If you don’t have a will, they may distribute your assets in ways you never intended. That’s where asset trust protection comes in. This article will discuss asset trust protection, its types, and which one is right for you!

What is an Asset Protection Trust?

An Asset Protection Trust or APT is a legal entity that can hold and manage your assets on your behalf. The purpose of an APT is to protect your assets from creditors, lawsuits, and other potential threats.

These asset protection vehicles offer strong protection because your assets are held in trust by a third party rather than owned outright by you. Your creditors cannot come after your assets if something happens to you.

How does an asset protection trust work?

A trust that protects assets is known as an asset protection trust. The grantor can be designated as a permissible beneficiary and given access to the funds in the trust account, which is what an asset protection trust does.

Its objective is for creditors to be unable to access the assets of the APT. A domestic APT also offers other advantages, such as state income tax savings in a no-income-tax state.

Irrevocability is an essential aspect of APTs. APTs allow for occasional disbursements, but these distributions are subject to the whim of an independent trustee. These trusts also include a spendthrift provision, under which the beneficiary is not allowed to sell, spend, or distribute trust assets without express permission.

Types of APTs

It’s critical to remember that all Asset Protection Trusts are irreversible. It implies that you can’t change or terminate them without the Trustee’s consent, which is tough.

Domestic Trust

A domestic asset protection trust is under the laws of the United States. The grantor must reside in the US, and the trustee must be a US citizen or resident alien.

The universal asset-protection trust laws in the United States are in domestic asset protection trusts. If you pick a one, you can set it up quickly and simply in states that allow them—now just 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota. But this trust is becoming more legalized in other states as well.

The main disadvantage of a domestic trust is that the American legal system handles your asset, which exposes them to court orders such as liens and judgments, federal bankruptcy laws, and various state legislation. Furthermore, because domestic APTs are new, they lack the reputation of proven case law, should there be a lawsuit or judgment against your estate.

Foreign Trust

Foreign asset protection trusts are sometimes offshore trusts since they are in an offshore account. These trusts, which exist in places like the Cook Islands and the British Virgin Islands, are established outside the United States.

Despite being more expensive than their domestic counterparts, foreign asset protection trusts have greater privacy protections than their US counterparts, resulting in even more effective asset protection.

Another advantage of offshore trusts is that countries that promote themselves as offshore tax haven seldom enforce US judgments against assets held by beliefs formed in their countries.

A foreign asset protection trust is under the laws of a foreign country. The grantor can be from any country, and the trustee can be from any country.

Medicaid Asset Protection Trust 

A Medicaid Asset Protection Trust (MAPT) is a trust utilized to minimize or remove assets from your total estate value. A substantial inheritance might put you at risk of losing access to Medicaid. Typically, before any Medicaid benefits begin to flow, individuals must use their assets.

Being eligible for a MAPT might allow you to collect Medicaid benefits and still reside in a primary home or earn money from investments. The two amounts may conflict when one or both people move out of the MAPT. The values would not jeopardize benefits as long as both are within the MAPT. It protects the person setting up the Trust and subsequent beneficiaries.

Pros and Cons of Asset Protection Trust

Regardless of the type of asset protection trust you choose, it is vital to understand the pros and cons of asset protection trusts.

PROS

Domestic accounts are easy to set up

One advantage of asset protection trusts is that you can set up a domestic asset protection trust quickly and simply in states.

Irrevocability

A key aspect of asset protection trusts is that they are irrevocable, meaning that you cannot change or terminate the trust without the trustee’s consent. It provides significant asset protection since creditors cannot seize the assets in the trust.

Foreign asset protection trusts may be more effective

Another advantage of asset protection trusts is that foreign asset protection trusts may be more effective than domestic ones. Foreign asset protection trusts are often held in offshore accounts, making it more difficult for creditors to seize the assets.

Offers tax benefits

If you are setting up an asset protection trust for yourself, you may be able to take advantage of some tax benefits. For example, if you set up an irrevocable trust, you may be able to avoid paying capital gains taxes on the appreciation of the assets in the trust.

CONS

You may lose control over your assets

One disadvantage of asset protection trusts is that you may lose control over your assets. It is because the trustee has complete discretion over how they manage the assets in the trust.

Expensive to set up and maintain

Another disadvantage of asset protection trusts is that they are expensive to set up and maintain. You will need to pay the trustee a fee for managing the trust and other associated costs.

Frequently Asked Questions About Asset Protection Trust

What Is the Difference Between a Revocable and an Irrevocable Asset Protection Trust?

In general terms, a Revocable Trust refers to the document’s flexibility. On the other hand, it is hard to alter an irrevocable trust. In any case, to truly offer asset protection, a Trust must be irrevocable.

How much does a trust for asset protection cost?

The cost of a Protected Asset Trust in an estate plan is generally not cheap. Legal expenses for a basic household plan might range from $2000 to $4000, depending on the complexity of the document. More complex trusts may cost well over $5000.

If you’re thinking about establishing an Offshore Asset Protection Trust, the expense may range from $20,000 to $50,000. In addition, there will generally be administration and asset management expenses of around $2000 to $5000 each year and one percent of the asset value.

Who needs an asset protection plan?

Because APT protection is so strong, it’s a good Estate Planning idea for anybody concerned about protecting their financial future from judgments, lawsuits, or creditors. There are, of course, benefits and drawbacks to consider before deciding to employ this strategy.

Bottomline

Safeguard your assets by putting them in an asset protection trust. There are different types of asset protection trusts, so make sure to choose the right one. Before deciding, consider the pros and cons of asset protection trusts, or get a qualified financial advisor to help you with your estate planning strategy.