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What Is an Asset Protection Trust?

May 11, 2023

An asset protection trust is a vehicle for protecting your assets during your lifetime. While it can offer numerous benefits, asset protection trusts are typically only used in limited situations because the person creating the trust (the grantor) loses control over the assets transferred into the trust. When and how to use asset protection trusts is complicated, and it is best to discuss it with an experienced attorney who can analyze your unique circumstances, and also consider the trust in the context of your overall estate plan.

Who May Benefit from an Asset Protection Trust?

One of the main reasons asset protection trusts are used is to prevent creditors from being able to seize assets to pay debts. As a result, they are often established by individuals in high-risk occupations, and by very wealthy individuals who may be the target of creditors and lawsuits. However, the trust will only protect assets if it is set up prior to having knowledge of a creditor, so it is important to be proactive and create the trust before any claims are made or threatened.

Asset protection trusts can also be used by individuals looking to eliminate or reduce their income and/or estate tax liabilities.

What Are the Pros and Cons of Asset Protection Trusts?

Asset protection trusts offer several unique benefits. One of the most significant is the ability to protect assets from creditors and lawsuits as mentioned above. The assets in the trust are no longer in your name. Accordingly, a creditor seeking to enforce a judgment against you will be unable to attack the assets held in the trust. Another benefit is that assets transferred to the trust during your lifetime avoid probate upon your death. You are also potentially removing the assets from your estate for tax purposes.

The biggest disadvantage is that as the grantor, you will have little or no control over the use or distribution of the assets within the trust. This is what allows the assets to be protected from creditors. However, some individuals may be uncomfortable with relinquishing control. 

Furthermore, the trust is irrevocable. Once your assets are transferred to the trust, you cannot unilaterally remove the assets from the trust and/or change the terms of the trust. This could complicate your estate plan if you later change your mind about the trust or its terms.

How Is an Asset Protection Trust Different from Traditional Estate Planning?

Traditional estate planning is generally focused on how assets are treated and distributed after your death. Asset protection trusts seek to proactively protect assets during your lifetime. However, it is recommended that the trust be created as part of your overall estate plan to help ensure continuity. 

If you want to know if an asset protection trust is right for you, contact us for a consultation. We work closely with clients to determine what options are best for them to achieve their goals and meet their needs. 

In our next post, we’ll discuss the different types of asset protection trusts and how to establish them.

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