Understanding Asset Protection Trusts

Acquiring assets is undoubtedly part of your overall estate plan; however, simply amassing assets without taking steps to protect those assets can cause the most well-drafted estate plan to fail. One way to protect assets is through the creation of an asset protection trust. With that in mind, the trust attorneys at Morris Hall PLLC explain what you should know about asset protection trusts.

Common Types of Asset Protection Trusts

• Domestic Asset Protection Trusts. As the name implies, a Domestic Asset Protection Trust (DAPT) is one that is established within the United States. State law governs whether a DAPT can be established and/or recognized within a state as well as what the rules are for creating or enforcing a DAPT. As of 2022, just over one-third of the states allow Domestic Asset Protection Trusts; however, is not one of them.
• Foreign Asset Protection Trusts. A foreign asset protection trust, commonly referred to as an “offshore trust,” is a trust that is set up outside of the U.S. and is governed by the laws of the country in which the trust is set up. Although a foreign asset protection trust can be established in any country, countries with laws that are friendly for foreign asset protection trusts include Belize, the Cook Islands, and the Cayman Islands.
• Medicaid Asset Protection Trusts. A Medicaid planning component within a comprehensive estate plan often includes a Medicaid asset protection trust. Medicaid eligibility — which may become crucial in your later years to cover the high cost of long-term care – will depend, in part, on the value of your assets. A Medicaid asset protection trust shields non-exempt assets, meaning they will not be counted for Medicaid eligibility purposes.
• Special Needs Trust. If you have a child with special needs, you may wish to continue financially supporting your child when he/she becomes a legal adult. Directing providing assets or money, however, can jeopardize your child’s eligibility for critical government assistance programs such as Medicaid and SSI. A special needs trust can protect assets designated for the support of your child by preventing those assets from counting against your child for eligibility purposes.

What Else Do I Need to Know about Asset Protection Trusts?

One potential disadvantage to most DAPTs is that establishing one will not protect assets from claims that already exist at the time the trust is created. For example, if you have an existing judgment for money owed on a credit card or car loan, establishing a DAPT will not usually prevent the creditor from getting at the trust assets. You must also be mindful of rules such as the Medicaid five-year look-back rule that allows Medicaid to consider asset transfers that occurred within the previous 60 months when you apply for benefits. In addition, most state laws allow for certain “exempt” creditors who can still get to assets held in a DAPT. Typically, exemptions include the state/federal government, a spouse in a divorce, and debts owed for alimony or child support.

Foreign asset protection trusts also come with a few important disadvantages, not the least of which is the cost of establishing and administering one. Because you are dealing with the laws of a foreign country, you must also understand those laws and be certain they will protect your assets. Moreover, assets held in a foreign country are vulnerable to political or economic instability within that country.

Finally, an asset protection trust is irrevocable. The irrevocable nature of the trust is what provides asset protection because the law considers assets to be owned by the trust (not by you personally) once those assets are transferred into the trust.

Contact Trust Attorneys

For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about asset protection trusts, contact the experienced trust attorneys at Morris Hall PLLC by calling 888-222-1328 to schedule your free consultation today.