What Is An Asset Protection Trust?

In this article: An asset protection trust (APT) is a proactive approach to planning for your family’s future, saving on taxes, and safeguarding your assets.

Published Jul. 27, 2020

Reading Time: 5 minutes.

An asset protection trust (APT) is a proactive approach to planning for your family’s future, saving on taxes, and safeguarding your assets. An Asset Protection Trust secures your assets on a discretionary basis for yourself and intended beneficiaries. An APT comes in varied forms.  Often set up to mitigate or avoid your assets being lost to taxation, divorce, or bankruptcy, an APT can help ensure your assets are shielded from creditors. If you’re looking to protect your wealth for the future, these types of trusts are the strongest protection from any judgments against your estate, and having one can favorably influence litigation and negotiations. 

What is an Asset Protection Trust (APT)?

An asset protection trust is a self-settled, irrevocable trust. This means that once it is created, an APT cannot be revoked by the settlor by changing the terms and the settlor no longer has control over the assets. The terms and assets are then owned by the trust and managed by a designated independent trustee. As Cornell Law states, an independent trustee “is not related to the beneficiary of the trust and does not stand to inherit any property under the trust. Independent trustees are preferred when family members are likely to disagree over [the] management of the trust.” 

The appointment of an independent trustee assures that assets are removed from the settlor’s ownership to be protected. Moreover, the trust tends to include a spendthrift clause, which means beneficiaries cannot sell, spend, or give away trust assets without specific stipulations. 

A few reasons you might consider an asset protection trust are: 

Key Benefits of an Asset Protection Trust include: 

  • Protection of you and your beneficiaries assets
  • Potential savings on estate taxes  
  • Ensuring that your assets carry on from generation to generation 
  • Make it possible for your heirs to skip the probate process for the trust’s assets if you pass away 

The benefits from a trust depend on where they are located meaning which U.S. state if they are domestic, or which offshore jurisdiction if they are foreign.

Domestic Asset Protection Trusts: The Basics

A Domestic Asset Protection Trust (DAPT) is one that is located in any of the 19 US states that have laws that allow for their inception. These laws started in 1997 when Alaska was the first state to enact a usable statute. As of 2020, 19 states have them: Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. Even if you do not reside in any of these states, you can still establish trust there. 

It is important to consult with a financial planner regarding which APT option is best for your situation, as laws vary depending on the state. You should also consider that the case law concerning these trusts is constantly evolving, as they are fairly new. For instance, in some states, a limitation period can make the assets more vulnerable to litigation. This can make fully protecting your assets somewhat uncertain and less reliable.

Foreign Asset Protection Trusts: The Basics

On the other hand, foreign asset protection trusts are offshore trusts, which are established outside of the US. An APT trust is more costly, but it also comes with more effective protection because of added privacy measures. These ensure that information regarding the assets held in the trust cannot be disclosed as easily. If you are looking to establish a foreign trust you should make sure it is for an authorized reason; tax evasion is not one of them. 

Some examples of legitimate reasons for establishing a Foreign APT include:

  • Reaping the benefits of holding your assets in a stable economy 
  • Having the possibility to invest internationally 

It is important to remember that these trusts are governed by the laws of the jurisdiction in which they are held. For example, just because you have an offshore account in Switzerland, doesn’t mean you are not subject to reporting on these funds. Interestingly enough, the Swiss government can divulge any illegal activity to your country of origin. Thus, it’s best to always abide by the laws governing where your APT is held, and always inform your financial advisor of any offshore, foreign account you may currently hold.

An Asset Protection Trust & Your Estate Plan 

An asset protection trust is a useful addition to your estate plan, and if you are considering creating one, it is important to understand how an APT works and how to create it correctly. The help of a financial planner is essential when setting up a trust as they will guide you in what it will mean for you and your beneficiaries. Additionally, they will help you decide which assets should be included in the trust and which are better outside of it. Trust assets usually include cash, securities, limited liability companies (LLCs), real estate, recreational assets (boats or aircraft), and business assets like equipment or intellectual property.

How To: Creating an Asset Protection Trust

Once you have decided that setting up an APT is right for you, you can set one up and create an asset protection trust document, ideally with the help of a lawyer. The document states who you choose an independent trustee, who will manage the trust, and who will act as beneficiaries. You should also specify how the assets should be managed on your behalf. When it comes to transferring the assets into the trust, a team of professionals, including your fiduciary financial advisor, will review and evaluate each asset. A trusted financial advisor will focus on evaluating the asset protection trust’s growth potential and tax implications, as well as how it fits into your comprehensive estate plan

Is an Asset Protection Trust for You?

An asset protection trust is not for everyone, but if you have the need and the means to set one up, it can be a great estate planning tool. With the help of experts in asset protection matters, you should take into consideration all of the above. It can be time-consuming and expensive in terms of all of the fees involved, including the ongoing fee paid to the trustee. A financial planner can help you strategize and implement best practices for your asset protection trust. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Ready to Get Started?

Real financial planning should pay off today, and in 10 years' time.