Is an Asset Protection Trust Right for You?

Apr 1, 2021 | Trusts

When it comes to protecting wealth, there are as many paths as there are reasons for seeking them—and different trusts serve different purposes. 

Asset protection trusts shield wealth from creditors and in some cases, work-related litigation. In recent years, they’ve become more common in the United States.

What’s an asset protection trust?

Asset protection trusts are used not just for the transfer of assets, but to protect assets from future creditors or lawsuits. In AP trusts, a grantor (the person creating the trust) places financial assets, properties, and/or a business into a trust. Financial distributions can be paid out to beneficiaries, including the grantor.

AP trusts are irrevocable—they can’t be undone—which is what makes them so effective at protecting assets. Anything placed into the trust—such as cash, stocks, property, a business, or bonds—is no longer owned by the grantor, but instead becomes the property of the trust.

Domestic asset protection trusts

Asset protection trusts originated overseas, providing protection for individuals with high-risk profiles and substantial assets. Because they can be “self-settled”—the grantor can also be a beneficiary—they weren’t initially permitted in the US. But in recent years, certain states have begun to legally recognize AP trusts.

Currently, seventeen states allow AP trusts. Texas isn’t one of them, but you don’t need to reside in the state where the trust is set up.

Domestic AP trusts are more flexible and less expensive than foreign AP trusts. But they’re also less secure because your assets still reside within the American legal system, under state and federal bankruptcy laws. They also lack extensive legal precedent.

Foreign asset protection trusts

Sometimes called “offshore” trusts, foreign asset protection trusts hold assets outside the US. Commonly established in tax havens that don’t enforce American legal judgments, such as the British Virgin Islands or the Cook Islands, offshore AP trusts are more expensive to set up—and more secure.

If a creditor or other entity wants to gain access to these funds, they have to proceed through a foreign legal system—which is expensive enough to deter some lawsuits from ever being filed in the first place.

When an AP trust makes sense

While asset protection trusts can be very effective at protecting your wealth, they are also legally complex and come with other considerations. 

They are irrevocable—once completed, they can’t be undone—and you’ll need to designate a trustee. If you set up a domestic AP trust, the trustee typically needs to reside in that state or a corporate trustee chartered in that state. With your attorney, you’ll also want to consider the laws of the state where you’re setting up your trust.

You can’t set up an AP trust to protect yourself from the demands of current creditors or lawsuits already underway. An AP trust can only protect your assets against future creditors and litigation. And the trust must be funded.

But there are many cases where these trusts make sense. Certain businesses or professionals who are at a higher risk for litigation—such as real estate professionals, some entrepreneurs, lawyers, executives, and doctors—may benefit from protecting their assets in case of lawsuits.

A well-considered decision

Asset protection trusts aren’t for everyone. They cost money to get up and running—and they also come with a certain amount of yearly maintenance. Likewise, the decision of which assets to place in the trust—and who else should be a beneficiary—requires careful consideration and professional legal and financial advice. 

That said, in addition to asset protection, AP trusts can reduce estate taxes, and in many cases, even the funds paid to beneficiaries can’t be touched by creditors. For certain individuals with substantial, high-risk assets, they’re worth the hassle. 

If you have questions about asset protection trusts or other forms of estate planning, contact us. Our experienced attorneys can guide you through the process.

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