While having a Trust in your Estate Plan can be an excellent way to safeguard your legacy and protect your family, the truth is, the type of Trust you use will affect how much protection you’re actually providing. Revocable Living Trusts are becoming increasingly popular, but they’re not generally used for asset protection. Actually, most asset protection schemes aren’t really effective either.
For some people, an Asset Protection Trust may be the way to go. We put together this guide to show you more about this special type of Trust - you’ll learn everything you need to know...from what is an asset protection trust, to how they work, to the different types available, and more. Read on to learn the value of an Asset Protection Trust, and to see if one would make sense for your needs.
What is an Asset Protection Trust & How Do They Work?
An Asset Protection Trust (APT) is a special type of Trust that’s used to protect your estate and assets from creditors. Generally, asset protection "schemes" are based on severing the connection between you and your assets. Ultimately, this means you have no control to use or distribute the assets. The theory behind APTs is that if you could choose to distribute assets to yourself, then you could choose to distribute them to a creditor.
A firm Asset Protection Trust can eliminate that aspect by transferring the ownership of your assets and/or property to a Trust that’s wholly controlled by a named Trustee. In short, you’re no longer the owner, which effectively removes almost any possibility of a creditor being able to gain access to your estate through a judgment or lien.
Types of Asset Protection Trusts
First it’s important to note that all Asset Protection Trusts are irrevocable. This means that once you create them, it’s nearly impossible, or at the very least extremely difficult, to alter or terminate them in any way without the approval of the Trustee.
There are three basic types of Trusts that can work to protect your assets.
Domestic Asset Protection Trust
A Domestic Asset Protection Trust is not available in every state, but for those that allow it, it’s one of the easier types of APTs to set up. One downside to a Domestic APT is the fact that it’s established and holds your assets inside the U.S. legal system, which is less foolproof than a Foreign Trust.
Foreign Asset Protection Trust
By contrast, the Foreign APT, which is also commonly known as an Offshore Trust, would be created outside of the United States. They cost more to establish, but have enhanced privacy protection and can potentially offer tax benefits, making them more effective.
Medicaid Asset Protection Trust
A Medicaid Asset Protection Trust (MAPT) is simply a Trust that’s used to reduce or eliminate assets being counted as part of your total estate value. A high-value estate could negatively impact your Medicaid eligibility. Typically if someone is going to use Medicaid benefits for things such as long-term care, their personal assets would need to be used before any benefits kick in. Having an MAPT could result in being eligible to collect Medicaid benefits while still being allowed to live in a primary residence or collect income from investments. As long as both are inside the MAPT, the values wouldn’t jeopardize benefits. This offers protection not only to the person setting up the Trust, but also for beneficiaries in the future.
Commonly Asked Questions about Asset Protection Trusts
Asset Protection Trusts can be complicated, but as you now probably see, they’re actually fairly simple in concept. Here are some of the common questions people have when they’re considering whether or not an APT may be right for them.
What is the Difference between Revocable and Irrevocable Asset Protection Trusts?
In general terms, a Revocable Trust simply means the document can be changed any time you like, as often as you see fit. Irrevocable, on the other hand, cannot be easily altered, if it can be changed at all. That said, in order to truly provide effective asset protection, a Trust must be irrevocable.
Which States Allow Domestic Asset Protection Trusts?
States that currently allow Domestic Asset Protection Trusts:
*Note: As Domestic Asset Protection Trusts continue to gain popularity, it’s reasonable to assume that more states will begin allowing them. Check your local state to know if it recognizes this Trust type.
How Much Does an Asset Protection Trust Cost?
Asset Protection Trusts in Estate Plans are generally not cheap. For a simple domestic plan that’s not complex, legal fees could range anywhere from $2000 to about $4000. More complicated Trusts could run up towards the $5000 range.
If you’re considering an Offshore Asset Protection Trust, you could be looking at costs anywhere from $20,000 - $50,000 just to establish it. Additionally, there will typically be administration and asset management fees that could run $2000 - $5000 per year, plus around one percent of the asset value.
Who Needs an Asset Protection Trust?
Because of the strong protection an APT can offer, it’s an Estate Planning strategy that could be a smart move for anyone who’s concerned about shielding their financial future from judgments, lawsuits or creditors. There are of course pros and cons you should be aware of before you decide to use an APT.
Offer asset protection
Easy to set up (Domestic)
Can protect Medicaid recipients
Often quite costly (especially Foreign APTs)
Not available in every state (Domestic APTs)
Irrevocable - not easy to alter
If your goal is to have more iron-clad asset protection than what some other forms of Estate Plans offer, an Asset Protection Trust may be worth looking into. Just be sure you know exactly what you’re getting and how to properly set it up.
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