DEFINITION of Asset Protection Trust

An asset protection trust is a vehicle for holding an individual's assets to shield them from creditors. Asset protection trusts allow creditors settle with their respective debtors on favorable terms and avoid 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 can only occur at an independent trustee's discretion.

BREAKING DOWN Asset Protection Trust

Only a few U.S. states fully allow asset protection trusts. As of 2017, these included but were not limited to Alaska, Delaware, Nevada and South Dakota. In addition, Colorado’s allows asset protection trusts on limited terms. However, one can establish an asset protection trust in these states without residing there. Offshore financial centers like the Cook Islands 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.

A prominent court case involving asset protection trusts in the Montana state court was recently settled in March 2018. Donald Tangwall commenced litigation against William and Barara Wacker, beginning in 2007. Prior to judgments being issued the Wackers transferred real property to an Alaska domestic asset protection trust. What ensured was a series of state court cases that unveiled jurisdiction laws of domestic asset protection trusts and brought to light certain conflicts among state laws.

Asset Protection Trust and Trust and Estate Law 

Keeping up to date trust and estate laws can be beneficial if you or your family is considering managing your wealth and the inheritance of future generations (and simultaneously avoiding hefty fees).

As of 2018, Internal Revenue Service (IRS) requires estates with combined gross assets and prior taxable gifts exceeding $11.18 million to file a federal estate tax return and pay estate taxes. That means that an estate of $11 million would not be required to file a tax return, and would be exempt from paying an estate tax. For the two years prior, 2017 and 2016, the return and taxes were owed if the estate exceeded $5.49 million and $5.45 million respectively.

In addition, while an estate tax is applied to an estate before the assets are given to the beneficiaries, an inheritance tax (active in Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) applies to assets after someone inherits them.