The asset protection trust exists to protect your property from creditors and keep your assets safe from lawsuits and legal challenges. But you lose all ownership of any assets in the asset protection trust.
Asset protection trusts have been gaining popularity as many look to protect their assets from creditors, lawsuits, and other financial problems. However, as with all money management tools, they also have their drawbacks. This detailed guide will lay out whatever you need to know about asset protection trusts and even further detail on the pros, cons, and strategies of anybody considering creating one.
What are Asset Protection Trusts?
You may have heard the term. An asset protection trust can also be known as an irrevocable trust. And there are several types of asset protection trusts, each with its own unique pros and cons.
What is Asset Protection Trust and Why are they Done?
An asset protection trust is a form of trust which permits you (the grantor) to put anything of value into a trust and out of your ownership. The main goal of these trusts is to protect assets from becoming available for collection on debts or lawsuit judgments. These assets are then safeguarded to pass down to future generations.
For professionals in high-risk fields (like doctors and business owners, for instance), this plan can offer a really strong extra layer of protection against lawsuits that might threaten their personal assets. Putting properties in a trust is an excellent way for people to feel secure about their money and to live their lives without worry,
Additionally, asset protection trusts are a beneficial addition to an estate plan. Not only do they shield assets while the grantor is alive, but they can also facilitate transferring wealth to heirs with little headache, lessening estate taxes, and avoiding probate.
Asset Protection Trusts Legal Framework
Asset protection trusts are subject to particular laws that change from state to state. Some states have popularity about being friendly to these kinds of trusts – states like Nevada or South Dakota.
If you’d like to talk more about the pros and cons of these trusts, speak with a lawyer in your area who knows the legal environment about how to protect your assets. Otherwise, if you mishandle your asset protection trust, it can leave room for a legal challenge that threatens everything you value.
Pros Of Asset Protection Trusts
We happen to believe that the asset protection trust is one of the strongest ways for individuals of high net worth to protect their assets. So, if you have an estate worth $10 million or more, here’s what you can expect from your asset protection trust.
Ensures Day-to-Day Financial Security and Peace of Mind
One of the greatest benefits of asset protection trusts is that they provide financial stability. None of your assets are left open to attack from creditors or lawsuits. You can operate peacefully knowing that you aren’t at risk of losing everything if sued. As you can imagine, this type of trust works well for people in high-risk professions – doctors, lawyers, and the like.
Creditors and Legal Claims Protection
An asset protection trust is a type of trust that is meant to protect the assets from being reached by creditors. This means that personal property, like a car, real estate, or even investment accounts cannot be taken from you.
Creating and controlling your very own asset protection trust gives you an edge against financial disputes. You know that if the worst should happen, you still have your asset protection trust to safely pass along your valuables to your loved ones.
Often, the very existence of an asset protection trust causes creditors to shift their focus elsewhere rather than spending years tied up in expensive litigation with only minimally effective results.
Estate Planning Benefits
Asset protection trusts provide more than just asset protection for the life of a person, these trusts also offer significant estate planning benefits as well. One of the pros of the asset protection trust is that it provides ways to smooth the transfer of wealth from one generation to the next and minimize estate taxes.
Additionally, asset protection trusts can also be used to shield your estate from probate and the public eye. In general, trust assets generally don’t pass through probate. This can save time and take some of the stress away from your family members dealing with a death.
In addition, asset protection trusts may allow for trust assets to be used for the long-term needs of beneficiaries such as funding education or healthcare, which can provide much-needed assistance for families with special needs dependents.
Drawbacks for Asset Protection Trusts
But are there some downsides? Sure, not everything in life is free. But we don’t think the cons of an asset protection trust outweigh the pros. In any case, here are some of the potential drawbacks of these trusts.
Potential Tax Implications
What are the potential consequences on estate tax by using an asset protection trust? The act of transferring assets into a trust can also trigger capital gains taxes or other tax burdens. Income received from trust assets may also be treated as a different taxable income, depending on how your trust is set up.
It is therefore important to speak with tax professionals and get a good idea of how different trusts work with your prospective tax laws.
Limited Control Over Assets
In a revocable (or living) trust, the grantor keeps a lot of control over their assets. They give up the security and protection of an asset protection trust in return for that control.
In an asset protection trust, you give up all control and ownership of your assets. But this is for the safety of your estate and the protection of your future plans. This might be troubling to people as, a grantor is giving up full ownership of everything they own.
So what do you value more? Control? Or the peace of mind of knowing your assets are shielded against harm and threat? This is the question you’ll have to consider.
Complexity and Cost of Establishing Trusts
The process of forming an asset protection trust can be highly complex and expensive. This is especially true if you have a large estate with a lot of considerations. Moreover, there is a lot of paperwork and legal work involved in that process which can be intimidating for someone who is not used to this.
You should also plan for the yearly filing of reports, tax dues, maintenance costs, distribution of assets, and so on. Normally, your trustee takes care of all of this, and in exchange, they charge an hourly rate or a percentage of the estate’s value.
What Do I Need to Know Before Creating a Trust?
There are a number of components to consider when you think about asset protection trust planning.
First, evaluate your financial circumstances as a whole. Look at your debts, your future risks, your asset value and the health of your investments. Maybe you need to think about if you need to raise finance at the time of need. Or maybe you need to have assets that can be quickly turned into cash. The assessment is trying to account for how effective your asset protection trust needs to be.
In addition to the financial evaluations, you need to evaluate your risk tolerance and determine how comfortable you are releasing control of your assets to someone else. You could be placing millions of dollars into the hands of a trustee. Are you OK with the finality of a decision like that?
Different Types of Asset Protection Trusts
There is not one universal asset protection trust. This is an umbrella term that covers a lot of options you might want to consider. And each of them has their own pros and cons. You might need a domestic asset protection trust (DAPT), an offshore trust, or an irrevocable trust.
Trusts created in the U.S. fall into a different category, known as DAPTs (Domestic Asset Protection Trusts), and contain differing levels of protection. This is based on your state’s law, not a federal law. Offshore trusts offer greater creditor protection but generally involve complex international tax issues. Those offshore choices usually are appealing to high net worth people with assets totalling over $10 million. But the offshore trust works exceptionally well for protection and privacy, common concerns for people with high net worth.
You also have irrevocable trusts, which also offer a ton of creditor protection, but they also require you to give up ownership. It’s a kind of all-at-once deal, and it can be very disconcerting for most newcomers to the trusts. But, keep in mind that there is a strategic aspect to this surrendering of control — it can simply act as an estate tax minimization tactic and protect assets from creditors down the road.
The right asset protection trust for you involves a delicate balance between these benefits and returns, and long-term financial objectives. This is a huge decision that should not be taken lightly.
The Job of a Trustee in Asset Protection
And lastly, but most importantly, we have the trustee. This is the person (or organization) responsible for upholding all your wishes for the trust. It’s their legal duty to fulfill your trust for the benefit of everyone named as a beneficiary. This is an enormous responsibility, and you want to choose the right person for the job.
A Trustee’s Legal Duties For Asset Protection Trusts
Perhaps no role is as important to the success of an asset protection trust than that of the trustee. The trustee is responsible for managing the financial investments, filing necessary tax returns and distributing trust income or assets to beneficiaries. This is something you will set out in your trust document.
A good and qualified trustee can make a big difference in how effective an asset protection plan turns out. Hopefully, before their trustee is appointed, you are carefully going over their duties, their experience, and their understanding of estate law and tax law. Basically, you want to know if they can handle the job.
You might also need to name a successor trustee. This is in the unlikely event that your trustee dies or is no longer able to fulfill their duties. With a successor trustee, the pro is that your asset protection trust continues along with a hiccup and your assets stay protected.
How to Appoint A Trustee for Your Asset Protection Trust
One of the most important decisions in creating an asset protection trust is picking the perfect trustee. What are the characteristics of a good trustee? Experience, honesty and the capability to handle sophisticated financial overtones. That’s just the start. Can they handle the task? Are they good at communication? Are they trusted by your beneficiaries?
In the end, they must be competent and able to properly administer the trust in the best interests of all beneficiaries. It is also important to examine a trustee's experience in the specific types of assets within the trust as certain classes (e.g., real estate, private equity) have unique management requirements.
From day one, set your expectations and objectives with the trustee. This makes it easy for them to build a positive relationship with you and your family. For example, a common request could be to have co-trustees, one from the family, and one from an outside firm. This works to achieve a balance between familiarity and professionalism. It also creates a healthy checks and balances system so that everyone acts in the best interests of the beneficiaries.
Asset Protection Trusts: Your Next Steps
Asset protection trusts do many things well and offer many advantages — but they come with challenges to boot. Learn these pros and cons before jumping into your own asset protection trust. And seek guidance from knowledgeable experts to create a strategy that best protects your wealth for your goals and desires.
Did you know that we’ve designed our own trust? It’s called the bulletproof trust, and it relies on Federal laws, not state laws. This makes it so much stronger than a typical domestic asset protection trust, which only works in 17 states. And most of those states have small populations. Want to know more? We can even show you the court cases to prove it works.
If you’re interested in this kind of trust, let us know by filling out the form below. Let’s talk about a plan for you and your family estate planning and asset protection.
