Asset Protection Trust

How to Protect Your Assets From Creditors and Lawsuits

What is an Asset Protection Trust?

An asset protection trust (APT) is an estate planning tool that can help you protect your assets from creditors, lawsuits, and judgments. An APT, allows you to take a piece of your wealth and put it in a trust to protect those assets from creditor claims, even if you become the target of a lawsuit.

Why do you need an Asset Protection Trust?

If you’ve accumulated a significant amount of wealth during your lifetime, you have a target on your back.

That is because we live in a highly litigious world.

Combine that with the fact that there is no shortage of attorneys willing to make claims for their clients based solely on contingency fees, and we have a perfect environment for lawsuits against wealthy individuals who are perceived to be “collectible”.

These conditions make it difficult for the wealthy to protect their assets, especially if they have a lifestyle or career that makes them more likely to be sued.

Luckily, there is a solution.

An asset protection trust (APT) can help you protect your money and property from creditors, divorce, and predatory lawsuits.

Who needs an Asset Protection Trust?

Asset protection trusts aren’t right for everybody.

Usually the people who benefit most from an APT are individuals who have accumulated a significant amount of wealth and may have a lifestyle or career that makes them more likely to be sued.

For example, doctors who may be subject to malpractice claims, business owners, executives, high profile individuals like entertainers or celebrities, officers and directors of banks, and general partners in real estate deals.

If any of the characteristics below describe your profession or lifestyle, you may want to consider an asset protection trust to protect your money, property, and family.

  • You are a high net worth individual in a high liability profession
  • Your position in the community makes you highly visible, traceable, and collectable
  • Your business or profession requires compliance with extensive government regulations that are hard to be aware of, let alone track, leaving you legally exposed
  • You are an employer that has potential exposure to employee related lawsuits
  • You have ownership in a business or liability generating assets such as real estate or rental properties
  • You serve on corporate or non-profit foundations and boards
  • The nature of your compensation is publicly available
  • Your status in the community creates a perception that you have a significant amount of liquid wealth

When do you need to set up an Asset Protection Trust?

If you wait until a claim or lawsuit occurs to put your assets in a trust, it’s too late. In order to provide you with the proper legal protection, your APT needs to be fully set up and funded prior to a claim or lawsuit occurring. Proper asset protection planning is preventative in nature, not reactionary. Usually it’s best to draft an asset protection trust as part of a larger estate plan. There are a variety of different types of asset protection trusts we will talk about in this article, but each have the same goal: to protect your wealth for you and your family.

What are the benefits of incorporating an Asset Protection Trust into an Estate Plan?

Combining an asset protection plan with an estate plan gives you the following benefits:

  • Protect your wealth from creditors and potential lawsuits
  • Designate who should receive your assets after you pass
  • Preserve your wealth by preventing expensive estate taxes
  • Maintain control of your assets after you die
  • Keep your financial matters and the transfer of your wealth private
  • Plan for incapacity
  • Avoid the long and stressful probate court process.

How does an Asset Protection Trust work?

In order to protect your assets properly, an asset protection trust must be an irrevocable trust. An asset protection trust is what is known as a self-settled spendthrift trust. This means that the person who creates the trust, also known as the settlor or grantor, is also the person who will receive the benefits of the trust.

To help clarify this, let’s briefly cover some of the key players who are named in the trust…

Who are the key parties in an Asset Protection Trust?

Settlor/Grantor

This is the person who creates and puts their assets in the trust.

Beneficiary

The beneficiary is the person for whom the trust is being set up to benefit. In the case of an asset protection trust, the beneficiary is usually the settlor/grantor. As mentioned above, this is what makes this type of trust a self-settled spendthrift trust.

Trustee

The trustee is the person who is responsible for managing all of the assets in the trust and making distributions of assets to the beneficiary. The trustee is named by the settlor/grantor when drafting the trust. This is an extremely important role, because the settlor/grantor no longer has access to the assets in the trust themselves and are reliant on the trustee to manage the trust according to the settlor’s wishes. 

Is an Asset Protection Trust an Irrevocable Trust?

An asset protection trust must be irrevocable. When you create an irrevocable trust, you transfer the assets you want to protect into the name of the trust. This is also known as funding the trust. Typically this can include cash, securities, companies like LLCs, and real estate.

After you fund the trust, you no longer own the assets, your trust does. Because you no longer own the assets yourself, there are no assets for creditors to collect. Additionally, the only person who can access and manage the assets in the trust is the person or organization who was named as the third party trustee. Lastly, the trust cannot be changed or revoked after it is created, essentially making it permanent.

What are the downsides of an Asset Protection Trust?

One drawback of an asset protection trust is that it can’t be changed or revoked after it is created. This means that as the settlor/grantor, you will permanently relinquish control of your assets. Instead, they will be put in the hands of your third party trustee to manage on your behalf. As a result, you have to be sure of your goals because you won’t be able to change it once it has been created.

These types of trusts are also very complicated. Since they are irreversible, you need to make sure it is done properly. This is why it is so important to consult with a professional trust attorney before creating your asset protection trust.

What are the different kinds of Asset Protection Trusts?

Domestic Asset Protection Trust

A Domestic Asset Protection Trust (DAPT) can be created rather easily in any state within the United States that has passed laws that permit the creation of these types of trusts. As of writing this article, 17 states currently allow DAPTs: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. The laws governing DAPTs vary from state to state, so be sure to consult with a trust attorney in the state you wish to create your trust.

Foreign Asset Protection Trust

Also known as an offshore trust, the foreign asset protection trust, is established in jurisdictions outside of the United States. Since the trust is in a foreign jurisdiction, it is not governed by U.S. law. This provides the trust and its assets with additional protection and privacy measures.

Is a Medicaid Trust and Asset Protection Trust?

Yes, a Medicaid Trust is a type of asset protection trust, but it’s primary purpose is different from a DAPT or FAPT. A Medicaid Trust is used to reduce the assets held in a person’s name to help make them eligible for Medicaid. These are commonly created when planning for expensive long-term nursing home care for an elderly loved one. If you want to set up a Medicaid Trust, it’s best to consult with a trust attorney who can help advise you on how to structure the trust to comply with Medicaid’s eligibility requirements.

What is the difference between an Asset Protection Trust vs Revocable Living Trust?

As outlined in this article, the main goal of an asset protection trust is to shield its creator from creditors and lawsuits. On the other hand, a revocable living trust is one of the best and most popular estate planning tools that allows you to designate who should receive your assets after you pass, preserve your wealth by preventing expensive estate taxes, maintain control of your assets after you die, keep your financial matters and the transfer of your wealth private, plan for incapacity, and avoid the long and stressful probate court process.

Additionally, a revocable living trust can be changed or revoked after it is created. This gives the drafter the option of changing the trust in the future if they would like to add or remove assets or beneficiaries in the future.

Asset protection trusts and revocable living trusts are two different types of documents that are used to achieve different goals. They are complements, not competitors, and achieve maximum protection when used together.

Conclusion

Asset protection trusts are useful legal tools to protect your assets from creditors and lawsuits. But, these types of trusts are very complicated and are not for everyone. Usually the people who benefit most from an APT have a significant amount of wealth and have a lifestyle or career that makes them more likely to be sued. The two most common APTs are Domestic Asset Protection Trusts and Foreign Offshore Protection Trusts. An asset protection trust is best used when incorporated into a comprehensive estate plan. If you think an APT may be right for you, call us now at Rochester Law Center at (248) 613-0007 to set up a consultation with an experienced trust attorney.

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Written By Chris Atallah - Founder, Rochester Law Center, PLLC
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Written By Chris Atallah - Founder, Rochester Law Center, PLLC

Chris Atallah is a licensed Michigan Attorney and the author of “The Ultimate Guide to Wills & Trusts – Estate Planning for Michigan Families”. Over that past decade, Chris has helped 1,000s of Michigan families and businesses secure their futures in all matters of Wills, Trusts, and Estate Planning. He has taught dozens of seminars across the State of Michigan on such topics as avoiding the death tax, protecting minor children after the parents’ death, and preserving family wealth from the courts and accidental disinheritance. If you have any questions, Chris would be happy to answer them for you – just call at 248-613-0007.