Did you know that there’s a way to protect your assets from future creditors and lawsuits?
With this irrevocable trust, you can also minimize estate taxes. However, asset protection trusts are not the easiest entities to establish. This trust must be created before a lawsuit, and even then, not all trust assets are protected equally.
What are the two types of asset protection trusts and which is best for you? This article helps explain the details and more.
What is an Asset Protection Trust?
One of the primary functions of an asset protection trust (APT) is to separate personal property and trust assets from creditors. A trust is a legal entity that you create to hold your assets so then the trust becomes the legal owner of those assets. Therefore, if a lawsuit or claim is made against you, no one can touch those assets in the trust.
Asset protection trusts are different from estate planning trusts. An estate trust allocates assets while asset protection protects them. Asset protection trusts are the best and strongest protection you can find from creditors, lawsuits, or any judgments against your estate.
How Asset Protection Trusts Work
The actual process of establishing an asset protection trust involves:
- Naming a trustee and at least one successor trustees
- Naming at least one beneficiary
- Choosing assets to be transferred to the trust
- Drafting a trust agreement
When an asset protection trust is established, the person who creates the trust (the trustor) transfers ownership of an asset into an irrevocable trust. Irrevocable means that once created, there’s no altering or terminating it without the approval of the trustee. While you can have revocable trusts, it’s not advised because you’re not provided ultimate protection.
Once assets are moved to an irrevocable trust, they’re typically protected from unknown creditors. With irrevocable trusts, you cannot name yourself the beneficiary and trustee.
There are two types of asset protection trusts you can establish – domestic asset protection trusts and foreign asset protection trusts. Determining which is best for you depends on your estate planning needs and state laws.
The most flexible is a domestic asset protection trust, which is established in the United States. Currently, Arizona does not have an asset protection law and residents must use other state laws to protect their assets.
Domestic asset protection trusts are currently only recognized in 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.
Foreign asset protection trusts are established outside the United States in offshore accounts. Foreign asset protection trusts are not subject to U.S laws, meaning they offer the best protection against creditors and lawsuits.
Because everyone has a different financial situation, there aren’t specific measures for setting up an APT. However, the general rule for setting a trust up is to have at least $1 million in assets to protect.
For an APT to be beneficial, you must be able to fund it. You can do this in various ways:
- Real estate
- Intellectual property
Benefit of Asset Protection Trusts
Protecting assets from lawsuits and creditors is just one of the main advantages of asset protection trusts.
Advantages of Asset Protection Trusts:
- Safeguards assets for beneficiaries
- Tax planning
- Estate planning vehicle
- Medicaid planning
- Privacy concerning
- financial matters
- Skips probate process
- Plans for incapacity
One of the biggest disadvantages is that they’re irrevocable. Once established, it’s nearly impossible to change it. Plus, you give up control of your assets as a beneficiary – not an owner. Additionally, asset protection trusts are more complex to create and not all states (like Arizona) allows domestic asset protection. This means if you want this type of asset protection then you’re subject to other state laws.
Should You Start an Asset Protection Trust
Asset protection trusts are not meant for everyone. Business owners, real estate owners, celebrities, doctors, executives, and people who have accumulated a lot of wealth typically benefit the most from creating APT’s.
An asset protection trust is an estate planning strategy for individuals with a high-profile background who want protection from creditors and lawsuits. In fact, most people will draft an APT during their estate planning. To properly protect your assets, it’s vital that you know exactly what you’re signing up for and how to efficiently set an APT up.
An APT must be fully set up and funded prior to any claim or lawsuit for it to provide you proper legal protection. It’s best to work with a skilled business attorney to help guide you through the process of creating a legally valid APT.