An asset protection trust (APT) might not be something you think about often or perhaps have ever heard of. However, it can be an excellent tool to protect your assets for your long-term financial success. While an APT is a more complex type of trust, it's valuable to understand the key aspects that set it apart from other trusts.
Great question. An APT is a type of trust used to hold an individual's assets and shield them from creditors, lawsuits, and judgments. What sets an APT apart from other trusts is it yields the highest asset protection. It's an excellent way to prevent costly litigation before it starts and can help sway settlement negotiations in favor of the trustor and beneficiaries.
An APT is a trust that is self-settled. This means the grantor can be a beneficiary of the trust and can access the trust account assets. Additionally, when the APT is structured well, it will prevent creditors from touching the assets in the trust. The assets of the trust may also benefit from tax savings when the trust exists in a state without income taxes.
A key requirement of an ATP is that it is irrevocable. This means that the terms of the trust cannot be changed once it is created without receiving consent from the trustees. An APT allows for some distributions, but these can only be given at the discretion of an independent trustee. Also, this type of trust has a special spendthrift clause which prohibits the beneficiary from selling or spending assets in the trust unless they meet certain requirements.
The two main types of asset protection trusts are domestic and foreign. Each has unique benefits and limitations that are best discussed in full with your financial planner.
A domestic asset protection trust provides one of the more flexible trust laws for protecting assets within the U.S. It's often easy and quick to set up an ATP in states where it is permitted. While this type of trust is only permitted in a fraction of states, it's becoming more common as states begin to recognize the legal status of an ATP.
While a domestic trust offers significant protection for your assets, it still is subject to risks from the U.S. legal system. These include court orders, such as judgments or liens, bankruptcy laws, and state laws.
Foreign APTs have similar flexibility to domestic APTs but are immune to many U.S. laws. This inherently protects assets from federally ordered seizures. However, there can be comparable risks from the foreign jurisdiction where the foreign ATP is held.
Regardless of the type of APT someone opts for, there are common ways to fund and transfer assets into the trust.
The name gives it away, but a trustor should fund an APT with assets. Common assets to fund an ATP include cash, LLCs, and business assets such as inventory, equipment, or intellectual property. Personal property such as boats and aircrafts or real estate are also excellent assets to place in an ATP.
This may be the heart of what makes an ATP so complex and, in many cases, very unique. To properly transfer assets into an ATP, many specialized parties must be involved. This includes financial planners, insurance brokers, lawyers, and more. For every asset placed in an ATP, multiple vantage points should be considered, such as the impact on taxation, protection from judgments, and future business growth.
An asset protection trust isn't for everyone, but it can be a great option if it aligns with your long-term financial goals. At Finley Davis, we strive to understand our clients' vision and select the financial tools to help them achieve their goals. To set up a consultation with one of our financial advisors, contact us today.