Quick Summary
An Asset Protection Trust (APT) is a key tool for safeguarding your wealth. This article explains what it is, the different types, and how to set one up. Here, you’ll also receive answers to commonly asked questions that will teach you how to protect your assets effectively.
What If You Lost Everything Overnight?
Defending wealth is just as important as creating it, and an Asset Protection Trust (APT) is one of the most effective strategies for shielding your financial assets from unexpected risks.
If you’ve never heard of it, an asset protection trust (APT) is an irrevocable trust designed to place a legal barrier between you and your assets, shielding them from future creditors, lawsuits, and bankruptcy claims.
This guide explains everything you need to know about APTs, including their types, how they work, when they help, jurisdictions to consider, costs, and how to set one up.
Why Listen to Us?
At Blake Harris Law, we set up domestic and offshore APTs and coordinate with independent trustees in jurisdictions such as the Cook Islands and Nevis. Led by Managing Attorney Blake Harris, our team handles trust formation, funding, and ongoing maintenance and reporting to help you safeguard and grow your wealth.
What Is an Asset Protection Trust?
An asset protection trust (APT) is an irrevocable, self-settled spendthrift trust that can protect properly transferred assets from future creditor claims and certain lawsuits when established and funded before a claim arises. APTs can hold a variety of assets, including digital holdings, company interests, investment accounts, and real estate.
Asset Protection 101: How Does an Asset Protection Trust Work?
APTs work by transferring your assets out of your personal name and into a trust managed by an independent trustee. Once the transfer is complete, those assets are no longer legally linked to you, safeguarding them from creditors and claimants.
An APT is also irrevocable in nature. This means that once it has been established, it cannot be undone. This irrevocable nature is what makes APTs strong and sets them apart from other wealth protection techniques, allowing you to protect your assets from a lawsuit or creditor claims.
Types of Asset Protection Trust
Asset protection trusts come in several forms, depending on the circumstances. In this section, we discuss the various types of APTs to help you understand the options available and pick the one that is most tailored to your financial plan and goals.
1. Domestic Asset Protection Trusts
A domestic asset protection trust (DAPT) is a type of irrevocable trust established under U.S. law that allows you to safeguard wealth while still being named as a discretionary beneficiary. In most traditional trusts, being a beneficiary can weaken protection, yet a DAPT is specifically structured to keep those safeguards in place.
More than 20 states, including Nevada, Alaska, Delaware, and South Dakota, authorize DAPTs, and you can set one up even if you live in a state that does not have its own statute. The strength of a DAPT, however, depends on the state in which it is created, and courts in other states may not always recognise its protections.
DAPTs may lack the global reach or confidentiality of offshore trusts, but they are nonetheless an excellent U.S.-based choice for long-term asset preservation. They are an accessible, affordable, and attractive choice for those seeking adequate asset protection without the hassles of an offshore trust.
2. Offshore Asset Protection Trusts
Also known as Foreign Asset Protection Trusts (FAPTs), Offshore Asset Protection Trusts (OAPTs) place assets under the laws of foreign jurisdictions with some of the strongest protection statutes in the world. Offshore trusts typically do not recognize U.S. court judgments. Creditors have to file a case in the foreign country to reach the assets, a process that is costly and time-consuming, ultimately discouraging most claims.
The top two OAPTs are the Nevis Trust, which offers robust protections for investments, real estate, commercial interests, and digital assets, including cryptocurrency, and the Cook Islands Trust, which is renowned for rejecting foreign court judgements.
OAPTs are not perfect, even if they significantly hinder creditors. They require additional I.R.S reporting, and noncompliance can put your assets at risk. Nonetheless, when set up correctly, and with experienced legal counsel, an OAPT is one of the most effective instruments for protecting wealth from outside claims.
3. Medicaid Asset Protection Trust
A Medicaid Asset Protection Trust (MAPT) is designed to help you qualify for Medicaid. Because Medicare does not cover long-term care for assisted living or nursing home care beyond 100 days, qualifying for Medicaid could be your best opportunity to receive late-in-life care while protecting your assets.
By placing assets in a MAPT, those resources are no longer counted as part of your personal estate. This makes it easier to meet Medicaid’s financial eligibility rules while ensuring your Medicaid is passed down to your beneficiaries. For many families, creating a MAPT is one of the most effective ways to secure late-in-life care and protect assets at the same time.
Should You Get an Asset Protection Trust? The Pros and Cons
APTs can be a useful way to protect your wealth, but you should weigh their main advantages and disadvantages before setting one up. The points below outline the key pros and cons to help you decide if an APT is the right fit for your finances.
Pros of Asset Protection Trusts (APTs)
- Protects Assets from Litigation: If a business owner is facing a significant lawsuit, moving assets into an APT legally separates the assets from the business owner. This separation makes it far harder and often too costly for creditors or claimants to pursue them.
- Strengthens Your Position in Legal Disputes: If legal action arises, an APT can give you a stronger position. APTs place complex procedural and jurisdictional hurdles between you and opposing parties, leading to quicker settlements on better terms and discouraging drawn-out disputes.
- Shields Wealth with Global Privacy: Strong legal safeguards and greater access to global privacy are two notable pros of offshore APTs. A Nevis trust, for example, could be used by a real estate speculator to keep property without having ownership information disclosed to the public. This added privacy makes it hard for U.S. courts or creditors to locate or access the assets, protecting both the property and the owner’s personal information.
- Provides Lasting Financial Peace of Mind: An APT gives you the assurance that your wealth is secure, so you can plan ahead and grow your assets without constantly worrying about possible claims.
Cons of Asset Protection Trusts (APTs)
- High Setup and Ongoing Costs: Setting up and managing an APT is usually more expensive than traditional estate planning options, especially if you choose an offshore trust. Beyond the initial trustee and legal fees, there are also ongoing administrative, compliance, and accounting expenses that you will need to budget for.
- Complex Legal and Tax Management: Asset protection trusts often come with complicated legal and tax rules. This makes them difficult to navigate, especially when you aren’t working with experienced professionals.
- Limited Protection Within the U.S: Domestic asset protection trusts generally don’t offer the same level of security as offshore trusts. U.S. courts can challenge them in certain situations, so their protection against legal disputes within the country is limited.
How to Set Up an Asset Protection Trust
Establishing an APT requires careful planning and precision. The following six steps outline how to create a trust that is both effective and fully compliant with the applicable state, federal, and international laws.
1. Choose the Right Type of Trust
Start by matching the trust to your situation. If you want a simpler and more cost-effective option, a domestic asset protection trust may be best. If stronger legal protection is your priority and you can handle higher costs, an offshore trust could be the right choice. To choose the right type of trust, consider your long-term financial plans, risk appetite, and how much oversight you are comfortable with having.
2. Hire an Experienced Attorney
APTs come with complex tax and asset protection laws, so working with an experienced estate planning attorney is essential. The right attorney is one with a proven track record with APT creation and know how to structure them to withstand creditor claims.
3. Draft the Trust Agreement
Once you have found a suitable lawyer, the next step is to draft the trust agreement. This document identifies the trust’s beneficiaries, appoints a trustee and a backup trustee, and explains your position as grantor. Your attorney should use exact legal language to guarantee that the agreement is enforceable, as well as arrange it to address any challenges and future amendments.
4. Fund the Trust
Next, decide which assets to put into the trust. Digital assets, stocks, bonds, currency, and real estate can all be held in APTs. But all titles and account records must be updated accurately, as only assets that are properly transferred will be protected under the trust.
5. Understand the Costs
Setting up an APT usually costs between $10,000 and $100,000, depending on how complex the agreement is and the level of protection you need. Following that, you’ll need to pay yearly trustee and maintenance costs, which normally vary between $1,000 and $25,000. Knowing these costs ahead of time allows you to better organise your budget and avoid unexpected expenses.
6. Maintain and Review Regularly
An APT needs to be reviewed regularly to remain effective. Consult your attorney, at least once a year, to discuss updates to your assets, changes in beneficiaries, and any shifts in tax or legal regulations that could jeopardize your wealth.
FAQs about Asset Protection Trusts
APTs are powerful legal tools, but they can be confusing to navigate. Here are answers to five of the most common questions clients ask about how APTs work and what they can achieve.
1. What Type of Assets Can You Put in an APT?
An APT can contain practically any valuable asset, including real estate, cash, business interests, investments, and digital assets such as cryptocurrencies. However, to achieve complete legal protection, all assets must be legally transferred and named in the trust’s name.
2. Can an APT Protect My Assets from Government Claims?
An APT cannot be used to avoid IRS obligations, criminal fines, or other federal claims. While some trusts may shield assets from private creditors, the government still has legal ways to access them when required by law.
3. Can an APT Shield My Assets During Divorce?
An APT can help protect assets during a divorce, but its effectiveness often depends on when it was established. Trusts created before marriage are more likely to hold up, while those set up after marriage can be challenged as fraudulent transfers.
4. Is There Any Tax Advantage to an APT?
Generally, no. APTs are designed to be tax-neutral, meaning they do not eliminate income taxes. However, specific APT types can help reduce estate taxes when used as part of a broader estate planning strategy.
5. Are APTs Only for the Wealthy?
Not at all. While wealthy individuals often use them, asset protection is not just for the wealthy. APTs can also help professionals in high-risk fields, business owners, and investors of all income levels protect their assets.
Final Thoughts: Protecting Your Wealth with APTs
Building wealth takes time, but left unguarded, it can unravel in an instant. An Asset Protection Trust (APT) helps keep your hard-earned assets safe. It shields your wealth from litigation, strengthens your position in disputes, and provides privacy to maintain security.
At Blake Harris Law, we specialize in creating strong, customized protections for your assets. Don’t leave your wealth exposed. Call (786) 692-6397 or contact us online to get started today.
