Trusts Law

Asset Protection Trust

When you own something precious, you want to protect it no matter what. Maybe you want to ensure you can give it to your kids when you’re gone too. An asset protection trust can do that. It’s like a secure box you can put your valuables in so you don’t lose them. It also ensures you can give those things to your loved ones when you die.

This article explains asset protection trusts. State trust laws vary and are complex. You should contact an asset protection and estate planning attorney near you to discuss trusts and whether one is a good strategy for you. An experienced attorney can give you legal advice about your unique situation.

What Is Asset Protection Planning?

Asset protection planning is using tools to protect your assets from risks like creditors and lawsuits. Common tools include the following:

  • Corporate entities like a limited liability company
  • Asset protection trusts
  • Insurance policies

Asset protection planning isn’t illegally hiding your wealth. It’s legally safeguarding the wealth you spent your life accumulating.

What Is an Asset Protection Trust?

An asset protection trust (APT) is a type of trust. It’s designed to protect your wealth from creditors and lawsuits. The assets you can put in an APT include the following:

  • Cash
  • Securities
  • Real estate
  • Business assets
  • Limited liability companies

The advantages of an APT are asset protection and probate avoidance. Probate is the legal process to close your estate after you die.

The primary disadvantage of an APT is that it’s an irrevocable trust. That means you can’t change or cancel it once you create and fund it. You also lose control of the assets you move into it. APTs can also be expensive to manage.

The domestic asset protection trust and the foreign asset protection trust are the two types of APTs.

What Is a Domestic Asset Protection Trust?

A domestic asset protection trust (DAPT) is an APT created under U.S. laws. Twenty states allow DAPTs as of 2022. Each state’s laws vary. The following are popular states for DAPTs:

  • Wyoming
  • Nevada
  • Delaware
  • Alaska
  • South Dakota

Generally, you can live in a different state than where you created the DAPT. But at least one trustee must live in the state. The trust must also be administered in the state. The downside to a DAPT is that your assets are held domestically, so they are at risk of domestic court judgments and bankruptcy laws.

What Is a Foreign Asset Protection Trust?

A foreign asset protection trust is governed by a foreign country’s laws. They are also known as offshore trusts. Many countries have offshore trusts. But the Cook Islands and the British Virgin Islands are the most popular.

Offshore trusts offer more privacy. They also don’t enforce U.S. court judgments. But they’re typically more expensive to maintain and manage.

Is an Asset Protection Trust Right for Me?

Whether an APT is right for you depends on your circumstances. Following are examples of people who an APT can benefit:

  • High net worth people: You can get protection beyond what insurance provides if you have substantial wealth.
  • Business owners: Businesses are often the target of litigation, and business liabilities can put your personal assets at risk without protection.
  • Professionals: Professionals like doctors and lawyers are exposed to malpractice claims. An APT can give you protection beyond your malpractice insurance.
  • Real estate investors: An APT helps protect real estate investments.

How Do I Create an Asset Protection Trust?

Creating an APT is a complex, two-step process. First, you must draft the trust document. There are three main parties to a trust, the grantor, trustee, and beneficiary. You are the grantor, sometimes called the settlor, since you’re creating the trust.

A trust beneficiary is someone who receives trust payments. You can name multiple beneficiaries. An APT allows the grantor to be a beneficiary. So, you will likely name yourself as a beneficiary. The trust payments are called distributions.

The trustee manages the trust’s assets. Some trusts, like a revocable living trust, allow the grantor to be a trustee. But you should designate an independent trustee for an APT. That means you don’t control the trust’s assets or distributions.

Next, you need to transfer your assets to the trust. You’ll need to know the proper way to move your assets. You must also understand any legal considerations, such as possible tax implications.

Contact an Estate Planning Lawyer for Help

Asset protection trusts are complex instruments, and setting them up is a complicated process best left to the professionals. Domestic asset protection trust laws vary. Foreign asset protection trusts mean dealing with foreign laws. An experienced estate planning attorney can help. They can ensure your trust is correct and achieves your goals.

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