Asset Protection Trust Definition

What is an asset protection trust?

An asset protection trust (APT) is a tool used to shield assets from creditors, lawsuits, or claims made against your estate. To create an APT, you (the settlor or grantor) write the terms of the trust, appoint a trustee and beneficiary, and transfer property and assets to the trust.

To effectively protect your assets, the trust must be irrevocable. This means you can’t amend or revoke the trust once you set it up unless the trustee approves. You also don’t have control over the assets once they’re transferred to the trust. Rather, the trustee manages the trust assets and only makes distributions according to the trust terms.

The effect of an APT is that any assets you put into the trust are no longer considered yours. If a creditor files a claim against you and wins, the trust assets are untouchable and can’t be used to satisfy the judgment because they don’t belong to you. It’s important to note that not all states legally recognize APTs, but you can set up a trust in a state that does. 

Asset Protection Trust Types

Domestic APT

Domestic asset protection trusts are created in the U.S. within a state that permits APTs. A domestic APT is attractive because it’s easier and less expensive to establish than a foreign APT. However, domestic APTs are relatively new, so their asset protection isn’t as certain compared to a foreign APT. They’re also currently available in less than half of all U.S. states.

Foreign APT

A foreign (or offshore) APT is a trust established outside of the U.S. In general, they’re more expensive to set up than domestic APTs, but they have broader privacy protections and can offer tax advantages. 

What are some asset protection trust advantages?

The biggest advantage that an APT offers is protection against lawsuits and creditors. This powerful tool can safeguard your assets from a personal injury claim or lawsuit. APTs are also relatively simple to set up.

What are some asset protection trust disadvantages?

As we mentioned above, APTs are irrevocable. It’s difficult to alter them, so be sure to thoroughly discuss this asset protection strategy with a financial or legal advisor. APTs also aren’t available in every state and can be expensive to create, particularly if you’re setting up a foreign one.