Protecting your wealth isn’t only for the ultra-rich. Anyone with valuable assets, like a home, savings, or investments, can benefit from extra protection. That’s where an asset protection trust comes in.
This type of trust helps shield your assets financial risks, playing a big role in wealth management.
But how do these trusts work? And are they the right choice for you?
What Is an Asset Protection Trust?
An asset protection trust is a legal arrangement that protects your wealth from creditors, lawsuits, or unexpected financial risks. When you transfer assets into this trust, they are no longer in your direct control. Instead, a trustee manages it, which adds a layer of protection against claims from others.
People set up these asset protection trusts for different reasons. Some want to protect their savings from business risks or legal issues. Others might use them as part of estate planning so their wealth stays within the family.
Medicaid Asset Protection Trusts and Other Types of Asset Protection Trusts
In the United States, a Medicaid asset protection trust helps protect assets while maintaining Medicaid eligibility for long-term care. Unlike foreign asset protection trusts, which shield wealth from creditors, these trusts focus on preserving Medicaid benefits. A properly structured trust can also protect assets for a surviving spouse after one partner passes.
How Do Asset Protection Trusts Work?
An asset protection trust works by legally separating your assets from your personal ownership. Once you transfer assets into the trust, they belong to the trust—not you. This makes it harder for creditors or lawsuits to take them.
Here’s a simple overview of how asset protection trusts work step-by-step:
- You create the trust. Work with an attorney to draft the trust document.
- You choose a trustee. This person or institution manages the assets according to the trust’s rules.
- You transfer assets. Money, businesses, property, or investments are placed into the trust.
- Your protection begins. Since the assets are no longer in your name, they are shielded from most legal claims.
Some trusts allow you to access funds under certain conditions. Others restrict access to ensure full protection. The rules depend on the type of trust and where it is set up.
3 Key Considerations for Setting Up a Trust to Protect Assets
Setting up a trust to protect your assets takes careful planning. It’s not as simple as moving money and assets into a new account. The process involves legal steps to make sure your trust is valid and provides real protection.
Here’s are some key considerations before you set you an asset protection trust:
1. Choosing the Right Type of Asset Protection Trust
You must decide between a domestic (US-based) or offshore (foreign-based) trust. Offshore trusts often provide stronger protection but come with more legal stipulations. Ideally, you should work with a firm that has experience working with this type of trust. They should be able to advise you on which suits your needs.
2. Selecting a Trustee
A trustee, as the name suggests, controls the trust. You must have the utmost confidence in their ability to work in your best interests. You can choose a person or an organization to execute your trust fairly and accurately.
3. Deciding on Which Assets Need Protection
It might seem tempting to move all your assets to a trust, but that isn’t always best. You should be selective about which assets need to be in this trust. Remember, once assets are transferred, they are no longer in your name.
Asset Protection Trust vs VA Pension Benefits
If you or a loved one is a veteran, you may be wondering how an asset protection trust affects VA pension benefits. The short answer is: it depends on the structure of your trust.
It’s not fair to compare asset protection trusts vs VA pension benefits, you have to look what each does for you. VA pension benefits depend on your income and assets. If you have too many assets, you may not qualify. The VA looks at your net worth, which includes savings, investments, and even property.
Having an asset protection trust can benefit you if you have VA pension benefits, but these factors apply:
- Assets in the trust, if structured correctly, may not count as part of your net worth.
- The VA has a three-year look-back rule. If you transfer assets within three years of applying for benefits, those assets may count.
- Some trusts allow you to access assets, which can still count against your eligibility. An irrevocable trust is usually required to fully protect assets from VA calculations.
5 Asset Protection Trust Benefits
An asset protection trust offers several advantages, especially for those looking to secure their wealth and protect it from legal or financial threats. Here are some key benefits:
1. It Shields Assets from Creditors and Lawsuits
Once assets are in the trust, they are no longer in your personal name. This makes it harder for creditors or lawsuits to seize them. Business owners, professionals, and individuals with high-value assets often use these trusts for extra security.
2. It Helps with Estate Planning
A trust can ensure that your wealth is passed down according to your wishes. It can also help avoid probate, which saves time and reduces legal fees for your heirs. Overall, it can make the process more efficient.
3. It Protects Against Divorce or Financial Disputes
Assets in the trust are generally protected from divorce settlements or claims from family disputes. This ensures that your money stays with the intended beneficiaries.
4. It Gives You Privacy
Unlike wills, which become public record during probate, trusts keep your financial matters private. This adds an extra layer of discretion to your estate planning. It's a valuable thing to have when unscrupulous persons can appear out-of-the-blue to make claims.
5. It Can Reduce Your Tax Burden
In some cases, a properly structured trust can lower estate taxes or other financial liabilities. Of course, this depends on tax laws and the type of trust you choose. Make sure to consult with professionals before you make a decision.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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