What Is an Asset Protection Trust?

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When you think about setting up a trust, the first thing that comes to mind is a plan for how wealth will be passed down after you die. But there is also an asset protection trust, which protects your assets from creditors while you’re still alive.

Read on to learn about the different types of asset protection trusts and how to set one up.

What Is an Asset Protection Trust (APT)?

An asset protection trust protects your assets from creditors and lawsuits. These are typically irrevocable trusts, meaning once they’re established, you’ll no longer have control of the assets, and they can’t be removed.

Asset protection trusts are common for people working in risky career fields. Doctors, for example, might use one to protect their assets if someone sues them for malpractice. Some people will use foreign trusts to protect their assets from divorce proceedings.

Types of Asset Protection Trusts

When considering an asset protection trust, you should understand the different types.

Domestic Asset Protection Trust

Domestic asset protection trusts are set up within the United States. However, not all states currently allow them, and each has different rules. 

Even though domestic asset protection trusts are irrevocable, you still have some control over the assets. This includes the ability to receive trust income, change the trustee and influence the trustee’s investment choices.

However, it’s important to understand that you can’t set up a domestic asset protection trust after a lawsuit has been filed against you. In such a situation, the creditors would have access to any assets held outside the trust when the lawsuit was filed.

Foreign Asset Protection Trust

Sometimes called an offshore trust, a foreign asset protection trust is established outside the United States. Not all countries will help you establish one, but popular options include the Cayman Islands, the Cook Islands and the Bahamas. 

These tend to be more expensive than a domestic asset protection trust, and if the assets were used for a crime, they wouldn’t be protected from recapture.

Medicaid Asset Protection Trust 

Medicaid asset protection trusts are established to help a person qualify to receive Medicaid. Because Medicaid eligibility is determined by your total assets, a Medicaid asset protection trust will reduce the assets used when determining eligibility. 

Be aware that you can’t apply for Medicaid directly after establishing a Medicaid asset protection trust. The law requires five years between opening the trust and applying for benefits. 

How To Set up an Asset Protection Trust

Setting up an asset protection trust is a complex task. It is best to hire an estate planning attorney to handle the work. 

The first step is to choose whether you want a domestic or foreign asset protection trust and determine its location. Next, your attorney will draft the trust agreement, and you’ll pick the trustee. Once this has been done, you’ll need to fund the trust. Funding sources can include investments, cash, real estate or other property you own.

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