DEFINITION of 'Asset Protection Trust '

A vehicle for holding an individual's assets to shield them from creditors. Asset protection trusts allow, if it is difficult for a creditor to seize assets, settle with the debtor on favorable terms instead of engaging in costly litigation. This vehicle has complex regulatory requirements, such as being irrevocable and contains a spendthrift clause. An asset protection trust does provide for occasional distributions, but those distributions must only occur at an independent trustee's discretion.

BREAKING DOWN 'Asset Protection Trust '

Only a few U.S. states allow asset protection trusts. As of 2012, these include Alaska, Delaware, Rhode Island, Nevada and South Dakota. However, one can establish an asset protection trust in these states without residing there. Offshore financial centers like the Cook Islands and Nevis also allow individuals to establish asset protection trusts. The trust's documents and administration, along with some or all of the trust's assets, must be located in the same jurisdiction where the trust was established.

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