Looking for ways to protect your assets from creditors or long-term health care costs? Consider an asset protection trust (APT). This type of irrevocable trust can be an important part of asset protection planning, shielding your assets and safeguarding your legacy.
Learn more about APTs, how they work, and the different types to decide if it could be the right option for you.
What Is an Asset Protection Trust?
As its name implies, an asset protection trust is a trust used to protect assets from creditors. While many asset protection methods disconnect you as an individual from your assets — meaning you can no longer use or distribute them — an APT provides some control and allows the trustee to distribute assets to you. However, because the assets in the trust are technically separate from your individual assets, creditors can’t get to them.
How Does an Asset Protection Trust Work?
With most trusts, there is a grantor, a trustee and a beneficiary. The grantor creates the trust, the trustee manages the assets, and the beneficiary receives funds from the trust. Sometimes, one person can have all three roles, but if the grantor has unlimited access to the assets, so do creditors.
An APT is a self-settled trust, which means the grantor is also a permissible beneficiary and can use the funds in the account. However, the grantor cannot serve as a trustee because that would give them direct control over the assets, and they would no longer be protected from creditors. The trustee oversees the trust, and the distributions can only happen with their approval.
APTs often contain a “spendthrift” clause prohibiting the beneficiaries from spending, selling or giving away assets without meeting specific criteria. They must also meet complex regulatory requirements, including being irrevocable.
Because APTs create a disconnect between assets and the individual, they help protect retirement savings from forced spending on long-term care costs and separate personal and business assets for liability protection. They can also be part of a broader tax minimization strategy.
These trusts can ensure your home and savings are passed to your beneficiaries as you intend, secure your children’s inheritance, and designate guardians for minor children. APTs can also shield business assets from lawsuits and creditors.
Who Can Benefit From an Asset Protection Trust?
Many individuals may find an APT useful, including:
- Retirees
- Business owners
- Those with high net worth
- Professionals at risk of lawsuits
- People concerned about long-term care costs
- People with blended families or complex familial structures
Pros and Cons of Asset Protection Trusts
APTs offer several benefits, such as:
- Shielding assets from lawsuits and creditors, including for long-term health care.
- Protecting your Medicaid benefits and securing family wealth for future generations.
- Helping with tax planning and legacy protection, including offering state income tax savings if set up in a state without income tax.
- Creating peace of mind for you and your family with clear asset distribution and guardianship planning, if necessary.
- Ensuring business continuity, lawsuit protection, and succession planning.
- Being easy to set up, depending on the type you choose.
However, APTs do have some drawbacks to consider:
- Setting up an APT can be expensive, depending on the type you choose.
- All types aren’t available in all states.
- An APT is irrevocable, meaning it’s not easy to alter.
Types of Asset Protection Trusts
All APTs are irrevocable, meaning they cannot be changed or ended without the trustee’s approval. There are a few different types of APTs:
- Domestic APT: A DAPT is set up in the United States, though it’s not available in every state. If it is available in your state, it’s generally easy to set up. However, holding your assets in the U.S. can still leave them vulnerable to creditors. As APTs become more popular, more states are likely to allow them.
- Foreign APT: Also called an offshore trust, these are created outside the U.S. They are more difficult and expensive to set up than a domestic APT, but can provide additional tax benefits. While these trusts offer more protection from U.S. asset seizure, they also expose your assets to risks associated with the foreign jurisdiction.
- Medicaid APT: An MAPT moves assets into the trust so they aren’t counted as part of your total estate value. Your estate value can affect your Medicaid eligibility. To use Medicaid benefits for long-term care, you must use your assets before benefits cover anything. An MAPT can allow you to receive Medicaid benefits while still living in your home and collecting investment income.
How to Choose a Trust Type
Different trust types are better for various situations. Here are some factors to consider to help you choose the best type of trust to protect your assets:
- Choose a DAPT if you want a trust that’s easy and less expensive to set up and manage, especially if you live in a state that allows them.
- Foreign APTs offer stronger asset protection and are better for individuals with higher risk, higher exposure to lawsuits, or significant assets.
- Most MAPTs are domestic trusts since Medicaid may still count foreign trusts as part of your estate. To maintain eligibility for Medicaid, plan early. Due to Medicaid’s five-year lookback rule, assets moved within the last five years still count toward your total estate value. Setting up an APT last-minute could harm your eligibility.
How to Set up an Asset Protection Trust
Here are the general steps for setting up an APT:
- Meet with your estate planning attorney to design a custom APT that meets your needs and complies with relevant laws. Your attorney can help you choose a place with favorable APT laws.
- Select a trustee, such as a family member, a trusted friend, or a third-party company. An impartial third party, such as a lawyer, can provide peace of mind that your trust is managed as you wish.
- Draft the trust document, naming the grantor, trustee, and beneficiaries. It should also include detailed instructions on how assets should be managed and distributed, and any special provisions, such as guidelines for changing trustees. This document creates the legal entity of the trust, which allows it to own assets.
- Select your assets, and transfer them into the trust. You can include bank accounts, investments, real estate, business interests, and other assets. Once the assets are transferred, you cannot remove them from the trust.
Frequently Asked Questions
Still have concerns about APTs? Here are the answers to common questions:
- Can I still access my assets? Technically, you won’t have direct access to your assets once they are in a trust. However, you can receive distributions through the trustee.
- How is an APT different from a revocable trust? As an irrevocable trust, an APT cannot be altered like a revocable trust can. While you can still access your assets, you cannot change the trust whenever you want, like you could with a revocable trust.
- Can I update the trust as my family changes? Since an APT is an irrevocable trust, making changes is very difficult and often impossible. Once assets are in the trust, the grantor cannot take them back or change the trust’s terms. Sometimes, an APT may allow limited flexibility, such as changing trustees or updating beneficiaries. However, adding new beneficiaries or changing the distribution terms could require a court order or might not be possible at all, depending on state law and the trust’s terms.
Create an Asset Protection Trust With Crow Estate Planning & Probate
APTs can be a powerful tool for families looking to secure their legacy and shield assets from unforeseen risks. Whether you’re planning for retirement, your children’s future, or your business, we’re ready to help.
Crow Estate Planning & Probate offers comprehensive, personalized solutions, empowering our clients with the information they need to make knowledgeable decisions about their futures. Our asset protection services go beyond wills, providing documents and guidance you won’t get with online DIY estate planning. We use an adaptable process to help retirees, young families, and business owners secure peace of mind and protect multigenerational wealth.
Schedule a free consultation today to discuss your unique situation and protect your assets for generations to come.