What is an Asset Protection Trust?
An asset protection trust is a legal structure that is designed to shield assets from creditors, lawsuits, and other potential liabilities. These types of trusts are particularly useful for high-net-worth individuals or those who are in professions that face a high risk of lawsuits — such as doctors, business owners, or real estate developers. By placing assets in a trust, the individual (sometimes called the "settlor") reduces the risk that those assets can be seized in legal claims and judgements.
What are the Key Components of an Asset Protection Trust?
An asset protection trust can fall into one of two categories — they can be either revocable or irrevocable. In most cases, APTs are irrevocable, meaning that once the assets are transferred into the trust, the settlor gives up control over them. These assets are legally owned by the trust and managed by a trustee. In contrast, a revocable trust does not provide the same level of protection because the settlor retains control and can dissolve the trust, making it vulnerable to creditors.
Some key features of an asset protection trust can include the following:
- Spendthrift clause — this provision restricts beneficiaries from selling or pledging their interest in the trust to creditors, offering a strong layer of protection.
- Trustee — APTs typically require an independent trustee (not the settlor) to manage the assets. This enhances protection by distancing the settlor from direct control.
- Discretionary beneficiaries — In some trusts, the trustee has discretion over distributing income or principal, which makes it harder for creditors to claim specific distributions.
Asset protection trusts may be foreign or domestic. Domestic APTs are established under the laws of certain states in the U.S. that have favorable asset protection laws (for example, Nevada, Delaware, Alaska, South Dakota). Foreign APTs, also referred to as offshore trusts, are set up in countries with favorable trust laws that offer strong asset protection, such as the Cook Islands or Nevis. While foreign trusts can provide enhanced protection from U.S. courts, they may involve more complexity and scrutiny.
What are the Benefits of an Asset Protection Trust?
Asset protection trusts come with a number of benefits. Among the major advantages is that they can provide protection from creditors. Specifically, assets in the trust are generally safe from future creditors, lawsuits, and other claims.
In addition to protection, APTs can serve as an essential tool for estate planning. These types of trusts can help to avoid probate and ensure the orderly distribution of assets. They also provide a high degree of financial privacy since they do not become part of the public record in the same way that property that goes through the probate process does.
Asset Protection Trusts Risks and Considerations
While there are a number of benefits that an asset protection trust can offer, there are also certain risks to consider. For instance, if assets are transferred to the trust with the intent of avoiding existing creditors, the transfer can be reversed under fraudulent transfer laws.
Setting up an APT can also have tax consequences — especially those that are offshore trusts. It's important to seek specialized legal and tax advice. Additionally, it’s vital to note that creating and maintaining an APT, particularly an offshore trust, can be costly due to legal fees, trustee fees, and ongoing management.
Contact an Experienced Michigan Trusts and Estates Attorney
If you are considering setting up an asset protection trust, it’s important to have an experienced trusts and estates attorney by your side who can guide you through the process — and ensure your goals are met. With offices in East Lansing, Mt. Pleasant, Grand Rapids, and Detroit, The Gallagher Law Firm offers a wide range of estate planning services to individuals and their families. To learn more about how we can assist you, contact us online, call (517) 853-1515 or email bpg@thegallagherlawfirm.com.