What Is An Asset Protection Trust (APT)?

An asset protection trust (APT) is a financial-planning trust vehicle that holds an individual's assets with the purpose of shielding them from creditors. Asset protection trusts offer the strongest protection you can find from creditors, lawsuits, or any judgments against your estate. An APT can even help deter costly litigation before it begins, or it can influence outcomes of settlement negotiations favorably.

Although foreign asset protection trusts might provide effective protection from a U.S. court-ordered seizure of assets, they also expose the assets to potential economic and political risks associated with the jurisdiction in which the offshore account is held.

Understanding Asset Protection Trusts

An asset protection trust is a self-settled trust in which the grantor is designated as a permissible beneficiary and allowed access to the funds in the trust account. If the APT is properly structured, its goal is that creditors won’t be able to reach the trust’s assets. In addition to providing asset protection, a domestic APT offers other benefits, including state income tax savings when situated in a no-income-tax state.

APTs contain complex regulatory requirements, such as being irrevocable. APTs provide for occasional distributions, but those distributions can occur only at an independent trustee's discretion. These trusts also contain a spendthrift clause, whereby the beneficiary cannot sell, spend, or give away trust assets without specific stipulations.

Asset protection trusts are a very complicated form of trust and as such, they are not for everybody.

Two Types of APTs

There are two kinds of irrevocable trusts that work as asset protection vehicles: domestic asset protection trusts and foreign (or offshore) asset protection trusts.

Domestic APTs

Domestic asset protection trusts offer the most flexible asset-protection trust laws in the United States. Should you decide on using a one, you may set it up quickly and easily in states that permit them—presently only 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. However, as these trusts become more common, more and more states recognize their legal status.

Domestic trusts' biggest downside is that your assets still reside within the U.S. legal system, which puts them at the risk of court orders, like liens or judgments; federal bankruptcy laws, and various state laws. Moreover, domestic APTs are new and as such, they lack the credibility of demonstrated case law; which could prove devastating were there a lawsuit or judgment against your estate.

Foreign APTs

Foreign asset protection trusts are also known as "offshore" trusts because they're often held in an offshore account. These trusts are established in jurisdictions outside of the U.S., such as the Cook Islands and the British Virgin Islands. Although they are usually more costly than their domestic counterparts, foreign asset protection trusts have more stringent privacy measures than their U.S. counterparts, so they offer even more effective protection for your assets. Another benefit is that jurisdictions that promote themselves as offshore tax havens usually do not enforce U.S. judgments against assets of trusts formed in their jurisdictions.

Key Takeaways

  • An asset protection trust (APT) is a complex financial-planning tool designed to protect your assets from creditors.
  • APTs offer the strongest protection you can find from creditors, lawsuits, or judgments against your estate.
  • These vehicles are structured as either "domestic" or "foreign" asset protection trusts.

APTs Are a Complex Form of Trust

Before you establish an asset protection trust, you should understand APTs and their ramifications thoroughly. Most enter these trusts along with the help of their financial planner.

Funding an APT

To consider an asset protection trust, it helps to be wealthy, or at least financially comfortable and diverse because APTs benefit no one until they're funded with assets. Trust assets typically include: 1) cash, 2) securities, 3) limited liability companies (LLCs), 4) business assets like intellectual property, inventory, and equipment, 5) real estate, and 6) recreational assets such as aircraft and boats.

Transferring the Assets

The process of transferring the assets to the APT is a critical one that requires assembling a wide range of skilled and trusted professionals ranging from financial planners and lawyers to insurance brokers and many in between. Next, there are some complex legal hurdles to pass as each asset being considered for transfer into an APT must be evaluated from different vantage points including its effect on legal protection, taxation, business and growth potential, and future distributions to spouses and heirs.

Other Considerations

Finally, an APT is designed to have its most substantial relationship to the state where the trust is formed—not the settlor’s state of residence—because, in a closely contested legal battle, the location of the trust's assets could be determinative.

Consequently, on a case-by-case basis, it may be wise to consider transferring certain assets—like securities and cash accounts, valuable and risky business and recreational assets, real estate, and settlor businesses—into an LLC.