Asset Protection Trust: A Complete Guide

Asset protection trusts are designed to shield assets from creditors, lawsuits, or other claimants. They are one of the most economical ways to protect your assets against lawsuits that may arise in the future. It is often used to hold assets when a person is going through bankruptcy proceedings. However, they can also be used for any purpose and may serve as an estate planning tool, among other things. Asset protection trusts are irrevocable, which means that once they are set up, and assets have been transferred into them, they cannot be changed or reversed.  As a result, they should only be set up after carefully considering the possible future events that may affect your assets.

Types of Asset Protection Trusts

There are two primary types of asset protection trusts: domestic asset protection trusts and foreign asset protection trusts. In a domestic asset protection trust, the trust can be created in a jurisdiction within the United States.  This may make it easier to enforce claims against the assets held by the asset protection trusts and avoid jurisdictional issues that prevent such enforcement. On the other hand, in a foreign asset protection trust, an offshore trust is established for this purpose. This type of trust can be created in a jurisdiction outside the United States.  An offshore trust is not subject to many U.S. laws, making it harder for creditors or claimants who are residents within the United States to enforce their claims against assets held by the foreign asset protection trust.

Advantages of Using an Asset Protection Trust

There are numerous advantages to using an asset protection trust. These include:

  • The ability to transfer assets into the trust’s ownership, which means they are protected from creditors.
  • It is possible to protect an asset with a higher value than what can be claimed in bankruptcy proceedings or other legal actions.
  • Assets held by an offshore trust may not be subject to creditor claims due to jurisdictional issues that prevent creditor enforcement.
  • Assets can be protected from a spouse’s creditors, as well as the federal government in some cases.

Disadvantages of Using an Asset Protection Trust

While there are many benefits associated with establishing an asset protection trust, potential downsides should be considered before moving forward.  Some disadvantages include: 

  • Costs involved with setting up and maintaining this type of trust. This may increase over time as the value of the assets held by a trust increases.
  • Assets that are not transferred into an asset protection trust may be taken by creditors or claimants who have a legal claim to them.

Advantages_and_Disadvantages_of_Using_an_Asset_Protection_Trust

How to Create Your Own Asset Protection Trust?

Creating an asset protection trust is a complicated and time-consuming process.  While you may be able to set up such a trust without professional help, if you decide that this route makes the most sense for your circumstances, it would probably be wise to consult with an experienced attorney or tax professional. However, there are two steps involved in creating your asset protection trust.

Step 1: Create the Trust Document

To create your asset protection trust, you will need first to establish a draft of the document that sets up the specific terms and conditions for this type of trust. There are numerous samples available online which can help you get started with this step.  However, it is crucial to understand that each state has its own laws governing trusts, so there may be some differences between what is available and your own state’s laws. It is important to understand that this type of trust must be created by the grantor (the person who establishes and funds the trust) or someone authorized in writing with the power to build an asset protection trust on his/her behalf.

Step 2: Fund the Trust

After the trust document is drafted and finalized, the next step is to transfer any assets you plan to protect into the trust’s ownership.  If possible, it will be beneficial for these funds to remain in a bank account, so they are protected from creditors even before they have been transferred into your new asset protection trust. Before transferring any assets into a new asset protection trust, it is important to understand that you may be liable for taxes on the income generated from these funds.

Final Thoughts

Creating an asset protection trust is a complicated process, which may benefit people with substantial assets they want to protect from bankruptcy proceedings or other legal actions. When considering this route, it’s important to understand that many potential advantages and disadvantages will likely be involved with setting up such a trust.  In addition, as with any legal matter, it is important to work with a qualified professional who can help you set up an asset protection trust that will meet your needs and provide the protection you desire.

An offshore or foreign asset protection trust can be set up outside of the United States for this purpose, while a domestic asset protection trust is one that is established within the United States. The basic purpose of both types of trusts remains relatively unchanged; however, there are some differences in their legal requirements and tax implications.
Before setting up a new asset protection trust, there must be valid and clearly defined reasons why such a plan is beneficial. In addition, it's important to understand that this type of trust requires strict legal formalities to remain effective. This means that if any laws governing the trust are not followed precisely, it may be deemed invalid.
There are numerous potential advantages to setting up a new asset protection trust. For example, these trusts can be used to protect people's assets from bankruptcy proceedings or prevent creditors from seizing funds during legal disputes. In addition, if someone is involved in any questionable financial activity, it can help shield their assets from questions about how those funds were acquired.
Like any legal arrangement, there can be many potential drawbacks to creating a new asset protection trust as well. For example, this type of plan involves high setup and maintenance fees, making it expensive to implement. In addition, if an asset protection trust is not set up correctly, it can be easily invalidated by the courts.
Setting up a new plan for protecting assets should never be considered lightly and requires careful consideration of many factors such as legal requirements and tax implications. Because of this, it is highly recommended that you work with a professional to develop your own asset protection plan rather than attempting to do so on your own.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.