Asset protection trusts are typically used to protect assets from creditors or reduce income or estate taxes. As discussed in our post What Is an Asset Protection Trust?, such trusts are not right for every situation. Further, there are different types of asset protection trusts available, and determining which one might be appropriate depends on the needs and goals of the one creating the trust (the grantor) and the intended beneficiaries of the trust.
Spousal Lifetime Access Trust (SLAT)
A SLAT is created by one spouse for the benefit of the other spouse. Property is gifted to the SLAT, which is irrevocable. The beneficiary spouse is sometimes a trustee and often the sole beneficiary of the trust. However, it may also include other individuals as beneficiaries, usually children, grandchildren, and relatives.
Importantly, under the terms of the trust, the donor spouse may not receive any benefits from the trust if the marriage falters or there is a divorce.
The gift to the SLAT typically does not result in taxes owed because the grantor spouse is using his or her lifetime gift and estate tax exclusion in transferring assets to the SLAT.
Lifetime Qualified Terminable Interest Property (QTIP) Trust
A QTIP trust allows a spouse who is significantly wealthier than the other spouse to make use of the less wealthy spouse’s estate tax exemption to eliminate or reduce estate taxes. The wealthier spouse can transfer assets over the estate tax exclusion amount into the trust. No tax would be due when the first spouse dies. When the second spouse dies, the assets in the trust would be taxable but only if they exceed the estate tax exclusion. If the less wealthy spouse dies first, the wealthier spouse still retains the assets. Regardless of who dies first, the wealthier spouse can provide in the trust who gets the remaining assets after both spouses die.
Self-Settled Domestic Asset Protection Trust
A domestic asset protection trust is similar to other trusts, except that the grantor can be a beneficiary. Other beneficiaries can also be named.
The trust must have an independent trustee and assets must be transferred before any creditor claims are made or threatened, otherwise, it will be deemed a fraudulent conveyance.
This type of trust is only available in the following states: Alaska, Connecticut, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
Foreign Asset Protection Asset Trust
Trusts created outside of the United States are known as foreign asset protection trusts or offshore trusts. They are often used because they can offer more privacy and protection from U.S. judgments and creditors.
Medicaid Asset Protection Trust
This type of trust is used to reduce or eliminate assets that would otherwise be counted as part of your estate for Medicaid eligibility purposes. It allows you to keep your assets and still qualify for Medicaid benefits.
Establishing a Trust
It’s important to consult with an experienced estate planning attorney to discuss whether an asset protection trust is right for you, and if so, what kind. You will also need to consider the selection of trustees and beneficiaries and what assets will be transferred to the trust.
One of the most important parts of the process is the actual “funding” of the trust. You must determine how much to put into the trust and then transfer the assets to the trust. If you do not complete this step, you likely will not receive any or all of the benefits of the asset protection trust.
An attorney is essential to help ensure that you make a well-informed decision and then execute your plan properly. We recommend that clients consider asset protection trusts as part of their overall estate planning process, so they take a comprehensive view of their estate.
If you are considering a trust or an update to your estate plan, contact us for a consultation today.