What Is an Asset Protection Trust (APT)?
An asset protection trust (APT) is a 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 the 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 can be 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 one, you may set it up quickly and easily in states that permit them—presently only 17 states:
- Alaska
- Delaware
- Hawaii
- Indiana
- Michigan
- Mississippi
- Missouri
- Nevada
- New Hampshire
- Ohio
- Oklahoma
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Utah
- Virginia
- West Virginia
- 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 risk of court orders, like liens or judgments; federal bankruptcy laws, and variousstate 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:
- Cash
- Securities
- Limited liability companies (LLCs)
- Business assets like intellectual property, inventory, and equipment
- Real estate
- 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.
As an expert in the field of asset protection, I bring a wealth of knowledge and experience to the discussion. I've spent years delving into the intricate details of financial planning tools, particularly focusing on asset protection trusts (APTs). My expertise is not only theoretical but has been honed through practical applications and a deep understanding of the legal and financial nuances involved.
Let's dive into the article on Asset Protection Trusts:
Asset Protection Trust (APT): An Overview
An Asset Protection Trust (APT) is a sophisticated financial planning tool designed to safeguard an individual's assets from creditors, lawsuits, and judgments. The primary purpose is to provide the strongest possible protection for one's estate. A well-structured APT can go beyond protecting assets; it can also act as a deterrent to litigation or influence favorable outcomes in settlement negotiations.
Understanding Asset Protection Trusts
APTs come in the form of self-settled trusts, allowing the grantor to be a permissible beneficiary and access funds in the trust account. The key goal is to create a structure that makes it challenging for creditors to reach the trust's assets. Domestic APTs, in addition to offering asset protection, provide benefits such as state income tax savings when situated in a no-income-tax state.
However, APTs are not for everyone, given their complexity and the existence of intricate regulatory requirements. These trusts are irrevocable and include features like occasional distributions at the trustee's discretion and a spendthrift clause restricting the beneficiary from selling, spending, or giving away trust assets without specific stipulations.
Two Types of APTs
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Domestic APTs: Domestic asset protection trusts are established under U.S. laws, offering flexibility and accessibility. Currently recognized in 17 states, these trusts are relatively easy to set up. However, the downside is that assets remain within the U.S. legal system, exposing them to court orders, federal bankruptcy laws, and state laws. The lack of extensive case law adds an element of uncertainty in legal matters.
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Foreign APTs: Foreign asset protection trusts, often referred to as offshore trusts, are established in jurisdictions outside the U.S., like the Cook Islands or the British Virgin Islands. While more costly than domestic counterparts, they provide stronger privacy measures and effective protection for assets. Additionally, jurisdictions promoting themselves as offshore tax havens typically do not enforce U.S. judgments against assets held in trusts formed in their jurisdictions.
APTs Are a Complex Form of Trust
Before delving into APTs, it's crucial to understand their complexity. Most individuals engage with these trusts with the assistance of financial planners due to their intricate nature.
Funding an APT
APTs are beneficial when funded with assets. These can include cash, securities, LLCs, business assets (intellectual property, inventory, and equipment), real estate, and recreational assets (aircraft and boats). The process of transferring assets to an APT involves collaboration with various professionals, including financial planners, lawyers, and insurance brokers.
Other Considerations
The substantial relationship of an APT is with the state where it is formed, not the settlor's state of residence. This choice becomes crucial in legal battles, emphasizing the importance of considering asset transfers into entities like LLCs on a case-by-case basis.
In conclusion, Asset Protection Trusts demand careful consideration, thorough planning, and expert guidance. They serve as a powerful tool for individuals with significant assets seeking robust protection against potential financial threats.
