A personal asset protection trust (PAPT) represents a trust that protects a grantor’s asset from creditors and legal judgments. In fact, a PAPT offers you the strongest protection against asset seizure. As an irrevocable trust, the grantor establishes the terms and conditions of the trust, such as which assets should go into the trust and naming the beneficiaries of the assets and any income generated by the assets.
The one issue that might deter you from creating a PAPT is that as the grantor, you cannot name yourself as the trustee of the trust. You have to name someone else to manage the trust. You also cannot change the terms and conditions of the trust. For example, you cannot modify the list of beneficiaries or remove certain assets from the trust.
However, the benefit of strong asset protection from creditors and legal judgment overrides the inability for you to control a PAPT. You can also include a spendthrift clause, which describes when a beneficiary gains access to assets and how the beneficiary should spend the money generated by the assets. For instance, a grantor of a PAPT can stipulate that a grandchild cannot access assets until the grandchild turns 18, and the money produced from the assets must go towards paying college tuition.
What Makes a PAPT Unique?
A PAPT is a unique type of asset protection trust because it gets all of its legal power from the living trust document. It establishes specific protections for your assets after they pass on to the named beneficiaries. Most living trusts pass on assets immediately or after the grantor’s death. This can be a problem because the passing of assets can cause a beneficiary to lose other sources of income. For example, let’s say one of your children receives government assistance of some kind. Inheriting assets from a standard living trust can reduce or eliminate the government benefits.
A PAPT is a different method for passing on your assets while remaining in control of how you want the assets distributed and used. You stipulate conditions that keep the money derived from your assets in the hands of your loved ones.
What Are the Two Types of Personal Asset Protection Trusts?
You have the option to set up a domestic or a foreign PAPT. A domestic trust is created for a specific reason, such as protecting assets meant for a child’s home purchase. Make sure you consult with an estate lawyer first because some states do not allow the formation of a domestic trust. A foreign trust protects your assets by following the estate laws enacted in the state where you create the trust. If a legal judgment goes against, only the statutes created in the state where you live apply to the court’s ability to force the judgment against you.
How Do I Fund a PAPT?
You have several options to fund a PAPT. You can assign cash, securities, and business assets, as well as more valuable assets such as your home and other types of real estate. Examples of business assets that remain protected in a PAPT include equipment, inventory, and intellectual property. If you have formed a limited liability company (LLC), you can place the LLC in a personal asset protection trust.
How Do I Transfer Assets?
Transferring assets is an important process that requires partnering with a highly skilled team of trusted professionals, including a lawyer, financial planner, and insurance broker. Because of the complicated legal obstacles that face a grantor who wants to create a PAPT, working with a team of trusted professionals can make establishing the trust much easier.
Setting up a personal asset protection trust can also be time-consuming. Working with one of the experienced estate planning attorneys at Cloud Peak Law Group can speed up the process, as well as help you determine which assets you should protect from creditors and legal judgments.
Learn more about establishing a personal asset protection trust by scheduling a free consultation with one of our state-licensed estate planning lawyers.