Protecting Your Asset: How Asset Protection Trusts Can Secure Your Legacy.

When you spend a lifetime accumulating assets and building a legacy, the last thing you want to worry about is pesky creditors or an unfortunate lawsuit taking the bricks out of your castle. The question becomes, what are you supposed to do to protect yourself from these threats, which is where tools like an Asset Protection Trust (APT) come into play. This article explores what an APT is, how such an entity can protect your assets, what the weaknesses and strengths of an APT are, and how to create an APT.

The term APT is a bit more expansive because there is both a domestic and a foreign asset protection trust, which is more commonly known as an offshore trust, both of which provide a significant level of protection for the grantor of the trust. Let us start off generally with what is an APT; “an asset protection trust is a self-settled trust in which the grantor can be designated as a permissible beneficiary and allowed access to the funds in the trust account.”[i] A caveat with any APT is that it is “an irrevocable trust, which means you relinquish control over assets placed inside the trust to a third-party trustee, such as a bank, accountant or lawyer. Once established, it’s nearly impossible to alter the terms of the trust.”[ii]But the division of ownership between the grantor and the grantor assets is where the ability of asset protection becomes possible “by signing over ownership of assets to the trust, these assets technically belong to a different entity instead of you. This generally puts your assets out of reach of creditors, liens and other judgements.”[iii] However, the amount of protection for your assets will vary depending on if you have a Domestic Asset Protection Trust (DAPT) or a Foreign Asset Protection Trust (FAPT); DAPTs are easier to create because they are available under the laws of some States in the United States, but this means that your assets “ still reside within the U.S. legal system, which puts them at risk of court orders, like liens or judgments; federal bankruptcy laws; and various state laws.”[iv] In comparison, APTs are more costly to create because of their offshore nature away from the jurisdiction in the United States, but that distance from U.S. jurisdiction is what provides more protection because they have more privacy measures and countries that are havens for FAPTs normally do not enforce U.S. judgments against assets in a FAPT. As can be seen, there are multiple avenues for protecting your assets, but the question now is how do you establish an APT?

An APT is like most trusts, it is a separate legal entity that holds the grantor’s assets, but where we see the difference is in the irrevocability and beneficiary designation in the trust. All APTS need to be irrevocable because of the underlying premise that if you are not ultimately distinct from your assets, then you could still have access to them for your benefit by revoking the trust if it was revocable.[v] This same premise underlies why the grantor cannot be named as the primary beneficiary of an APT because “ if you could choose to distribute assets to yourself, then you could choose to distribute them to a creditor”[vi] Otherwise, APTs are created in essentially the same way you would make any other trust, with the only caveat being a FAPT is going to require substantially more effort and resources to create because of its offshore nature. As has been alluded to, APTs have challenges and benefits, but we are going to dive into the pros and cons of APTs so you can fully grasp how an APT could play into your larger estate plan.

APTs have many positives, but their main benefits for any person can be compiled into three categories, wealth protection, tax efficiency, and privacy.[vii] Since we have discussed the wealth preservation elements above, the remainder of this portion shall provide attention to how APTs are helpful with tax efficiency from the state taxation level and the privacy features that prevent prying eyes from viewing what assets you earned.[viii] APTs can have tax advantages because if a DPAT is “established in [a] state without state income tax may avoid state taxation” on the assets in the DPAT.[ix] The other benefit of an APT is the privacy aspect, because, unlike other documents such as Will, unless there is a contest or some form of foul play, an APT should never become a public document, ensuring a high level of privacy for the creator.[x] While these pros of an APT make it an attractive legal entity, there are also some considerable cons with APTs such as the complexity and expenses of establishing an APT, but more importantly, there are limitations to asset protection that may arise. [xi] The biggest concern for a creator of an APT is limitations of asset protection because “generally, an APT must be created before any claims are brought against you. For domestic APTs, it can also take several years after the trust is established before assets are fully protected from creditors.”[xii] An APT can be a very useful tool in the right hands, but they come with many possible complications that someone considering an APT must grapple with before deciding to incorporate one into their overall wealth plan.

APTs can be exceptionally useful tools to avoid creditor attachment to your assets; however, they are not the easiest instruments to create since complexity arises in the disgorgement of asset ownership. However, if you are at a significant risk of creditor and legal judgments attaching to your resources, then an APT could mean all the world to preserve your wealth. As this article has highlighted, it will be essential to retain a lawyer for an APT because of limitations surrounding the necessity for the trust instrument being in place before a claim is instated and the complex formalities of an APT. An APT can be an amazing tool for your wealth plan, but its complexities can make it a daunting tool to effectively use, so you should speak to your lawyer about how an APT may benefit your needs.

[i] https://www.investopedia.com/terms/a/asset-protection-trust.asp#:~:text=An%20asset%20protection%20trust%20(APT)%20is%20a%20trust%20vehicle%20that,any%20judgments%20against%20your%20estate.

[ii] https://www.bankrate.com/investing/financial-advisors/what-is-an-asset-protection-trust/

[iii] https://www.bankrate.com/investing/financial-advisors/what-is-an-asset-protection-trust/

[iv] https://www.investopedia.com/terms/a/asset-protection-trust.asp#:~:text=An%20asset%20protection%20trust%20(APT)%20is%20a%20trust%20vehicle%20that,any%20judgments%20against%20your%20estate.

[v] https://trustandwill.com/learn/asset-protection-trust?srsltid=AfmBOoq6fKFQ9tQ_uknHeRulaL0CmDEeA-tC9rgr66VKiQUkVTBZiXjI

[vi] https://trustandwill.com/learn/asset-protection-trust?srsltid=AfmBOoq6fKFQ9tQ_uknHeRulaL0CmDEeA-tC9rgr66VKiQUkVTBZiXjI

[vii] https://www.bankrate.com/investing/financial-advisors/what-is-an-asset-protection-trust/

[viii] https://www.bankrate.com/investing/financial-advisors/what-is-an-asset-protection-trust/

[ix] https://www.bankrate.com/investing/financial-advisors/what-is-an-asset-protection-trust/

[x] https://www.bankrate.com/investing/financial-advisors/what-is-an-asset-protection-trust/

[xi] https://www.bankrate.com/investing/financial-advisors/what-is-an-asset-protection-trust/

[xii] https://www.bankrate.com/investing/financial-advisors/what-is-an-asset-protection-trust/