Asset protection trust
An asset protection trust is a type of trust that keeps creditors from being able to access a person’s assets, such as houses, money, or a business. This article explains how regular and Medicaid asset protection trusts work, with sample scenarios. It goes on to cover who should consider creating an asset protection trust and the pros and cons of setting one up.
What is an asset protection trust and how can I set one up?
An asset protection trust is a type of trust that keeps creditors from being able to access the assets of the person who created the trust. These can be assets such as houses, money, or a business, among other things.
An asset protection trust is a complex financial and legal entity. It can only be created in consultation with an estate-planning professional.
Asset protection trusts can be U.S.-based (domestic) or based in another country (offshore). So far, 17 states allow an asset protection trust and 33 do not.1
Both types of asset protection trust are irrevocable. This means that once they are created and assets are put into them, the trusts cannot be dissolved and the assets cannot be taken back out.
How does an asset protection trust work?
Like other trusts, an asset protection trust works by transferring the ownership of the assets from a person to the trust itself. These trusts can protect assets while a person is alive and also after a person dies. Once assets have been placed in such a trust, the person no longer technically owns the assets.
While a person is alive
When a person has an asset protection trust set up, they generally cannot lose the assets within them in a lawsuit, bankruptcy, divorce settlement, or other legal action.
As an example, let’s say Claire has a house, investment fund, and valuable art collection. She moves these assets into an asset protection trust. Even though she can still use all the assets, she no longer legally owns them. If Claire and her husband, Julian, later go through a divorce and Julian is awarded half of Claire’s assets, the assets in the trust will not count, because they belong to the trust, not Claire. Julian will only get the half of Claire’s assets that are not in the trust.
When a person has died
Asset protection trusts can also protect assets after a person dies. This kind of trust is sometimes called a dynasty trust or legacy trust. A parent who has significant assets to leave their adult children after they die can do so through an asset protection trust instead of giving them to the children directly through a will. The adult children, like their parents, do not technically own the assets they inherit, so those assets continue to be protected from lawsuits, divorce settlements, and so on.
For example, Jeffrey wants to leave his son Stephen property, money, and a stock portfolio. But he knows that Stephen is a restaurant owner—an occupation that is at high risk for bankruptcy. So Jeffrey leaves Stephen his inheritance through an asset protection trust, which means that the assets legally belong to the trust, not Stephen. Sure enough, a few months later Stephen’s restaurant goes into bankruptcy. Stephen’s creditors cannot touch the assets that he inherited from his father.
How does an asset protection trust for Medicaid work?
A Medicaid Asset Protection Trust (MAPT) helps someone qualify for Medicaid when they would normally have too much income or too many other assets to qualify.
Like any other asset protection trust, MAPTs work by making the assets belong to the trust and not the person. This then gives the person a low enough income or few enough assets that they may qualify for Medicaid.
A Medicaid asset protection trust needs to be set up at least five years before the person applies for Medicaid.2
What are the pros and cons of an asset protection trust?
The main advantages of setting up an asset protection trust are
- It keeps assets protected from creditors, in a person’s own lifetime and potentially for multiple generations of heirs.
- The assets in the trust are not subject to estate taxes or probate fees.
The drawbacks of setting up an asset protection trust include
- It can be complex and expensive to set up. Legal fees for a straightforward domestic plan can be $2,000-$4,000, and it gets more expensive when the trusts are more complicated. Offshore trusts are even more expensive to set up, and they have significant yearly administration costs.3
- They are irrevocable, so they cannot be easily changed or terminated.
Who should set up an asset protection trust?
Experts most often recommend asset protection trusts for people in three categories:
- Those who are wealthy. People who have a lot of assets to lose if they get sued or divorced or if their business fails, or who want to protect their heirs from these types of creditors.
- Those in occupations at high risk for bankruptcies or lawsuits; this could include business owners, doctors, and contractors.
- Those who want to protect assets they have passed down to adult children. For example, people may want to protect a family business or investment portfolio from bankruptcy, divorce settlements, or mismanagement due to heirs who might be irresponsible with money, be in a rocky marriage, have substance-abuse issues, or be in a high-risk occupation.
Decisions relating to aging and the end of life
Estate and inheritance taxes
Financial plans versus estate plans
Overview of estate plans
Overview of trusts
Protecting assets from mishandling
Protecting assets from taxes and fees
Will and testament
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