Trusts are flexible instruments in estate planning that offer bypass of probate, federal estate tax, and asset protection against one’s beneficiary’s spendthrift tendencies. Among these is the Asset Protection Trust (APT), a special trust that protects assets against creditors and litigants. This kind of legal setup ensures that the moment you place assets into a trust, they are removed from your direct control and ownership and placed at the disposal of a trustee for the benefit of specifically named beneficiaries. This arrangement protects the assets from creditors while still providing indirect benefits to the grantor.
Understanding the Types of Trusts: Revocable vs. Irrevocable
There are two main types of trusts: revocable and irrevocable. A revocable trust is simply one that can be canceled or altered during the lifetime of the grantor. However, the assets in the trust are a part of the estate of the grantor; they lack the same procession from lawsuits by creditors. Much stronger asset protection comes through irrevocable trusts, including those that cannot easily be changed or dissolved by totally removing the assets from the ownership of the grantor. Asset protection trusts fall under the jurisdiction of irrevocable trusts because there must be a clear-cut separation between the individual and his or her assets.
Asset Protection Trusts – How They Work
Asset protection trusts, as a matter of definition, are irrevocable. By this nature, once assets are placed in the trust, they cannot easily be amended or revoked. They are made to place assets outside of the reach of a lawsuit, creditor, or other claim. By placing the ownership of the assets in the trust, they are removed from the personal estate of the grantor and thus beyond reach for seizure by creditors. Interestingly, the indirect benefit to this asset can still be allowed through self-settled trust, whereby the grantor can act as both grantor and beneficiary under the trust if certain conditions are met.
Like any asset protection device, an asset protection trust has to be carefully designed and drafted using specific language. Unlike virtually every other type of trust, these cannot be amended or revoked readily, so it is necessary to work with a seasoned estate planning attorney in crafting the most appropriate structure to align with your financial goals.
Types of Asset Protection Trusts
There are two large categories of asset protection trusts. They include domestic and foreign, or offshore, asset protection trusts. Both have their own specific benefits and considerations.
Domestic Asset Protection Trusts
DAPTs are available in 17 states, including states such as Alaska, Delaware, Nevada, and South Dakota. They grant some protection against creditors, but allow the grantor some control over the assets. However, because they have to be governed by U.S. laws, an opportunity will still exist for a creditor to take the trust to court, where they will have a chance to obtain access to said assets.
Foreign Asset Protection Trusts
Additionally, there are foreign or offshore asset protection trusts, which place credibility outside the U.S. jurisdiction, thereby providing an additional layer of protection. The drawback of foreign or offshore asset protection trusts is that they often require a higher establishment and ongoing cost than domestic asset protection trusts, and they offer stronger protection against lawsuits and judgments. Because of the international legal complexities and privacy protections, foreign trusts can make it much more difficult for creditors to access assets.
Is an Asset Protection Trust Right for You?
Asset Protection Trusts are essential for individuals in high-risk professions, such as doctors, corporate executives, and business owners, who are more likely to face lawsuits. As such, they are better advised to move their assets into an APT, ensuring wealth is safeguarded against lawsuits or creditor claims. However, these trusts can also benefit anyone seeking to protect their estate against unpredictable events such as divorce, bankruptcy, or civil lawsuits.
Before establishing an APT, the assets one intends to protect must be identified beforehand, and a professional should be consulted on whether this type of trust fits your financial and estate planning goals. Not all assets are protected as some will fall under specific state and federal laws, such as real estate life insurance and retirement accounts.
How Mucci Law Can Help
It is one of the most critical steps to protect your assets and wealth from frivolous litigations in the future to create an asset protection trust. These trusts are very intricate and thus require the expertise of a knowledgeable estate planning lawyer attuned to subtle details of the asset protection law. Mucci Law has developed customized asset protection designs and strategies onshore and offshore, including several foreign asset protection trusts. With years of experience, Mucci Law will help guide you through the uncertain legal waters, protect your assets, and give you peace of mind about what’s ahead. Whether you seek knowledge about irrevocable living trusts or consider using offshore trusts for extra security, our team is available to help you tailor your approach to your specific needs and circumstances.
Frequently Asked Questions (FAQs)
1. What are the differences between a revocable trust and an asset protection trust?
The revocable trust is subject to change or can be revoked while the grantor lives and remains in that grantor’s estate, so it’s flexible but offers limited asset protection. An asset protection trust, on the other hand, is irrevocable and, therefore, cannot easily be altered. It gives more protection by pulling the assets out of ownership by the grantor and keeping them safe from creditors and lawsuits.
2. Can I be the grantor and beneficiary of an asset protection trust set up through the same trust?
Yes, one can make a self-settled asset protection trust in which one is a grantor as well as the beneficiary, but it must be established correctly to ensure it provides the intended protections.
3. Which are more secure, domestic or foreign asset protection trusts?
In most cases, more security is afforded by offshore or foreign asset protection trusts because they are located outside of the U.S. and, therefore, are outside of the physical reach of a U.S. creditor. It does not necessarily mean that foreign (offshore) asset protection trusts trump domestic asset protection trusts.
Abhishek Shah
