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Apr 2025 Newsletter – Asset Protection Trusts

Asset Protection Trusts (APTs)

A thorough understanding of asset protection methods is a key component of business and estate planning.  All business clients need education in this complex area of the law.

Domestic asset protections are corporations, limited partnerships, LLC’s, domestic asset protection trusts (DAPT) and irrevocable trusts. These legal tools and arrangements are effective, reliable and constructive methods in business and estate planning.

Clients must learn what an Asset Protection Trust (APT) is and how it can help you protect your assets from creditors, lawsuits or judgments and compare domestic and foreign APTs and their benefits and drawbacks.  Asset Protection Trusts are irrevocable trusts that shield a person’s assets from creditors, lawsuits, and court decisions.  They are used to protect assets from future creditor claims and can be either foreign or domestic.  These trusts are complex and often require legal assistance to create. Protecting your assets is crucial and vital when drawing up an estate plan. Once again, an asset protection trust can help you keep your assets from creditors, lawsuits and even divorce claims and civil actions.

A domestic asset protection trust (DAPT) is an irrevocable trust design that allows the grantor to be a permissible beneficiary while safeguarding the trust’s assets from being reached by creditors if properly structured. DAPTs are recognized in certain states and can be beneficial estate planning strategy providing a layer of protection against lawsuits and financial threats.  Each state has its own legal framework governing these trusts, which can affect their effectiveness and implementation. At least 20 states in 2024 permit DAPTs including Alabama, New Jersey, Connecticut, Delaware, Indiana, Ohio, Utah, and West Virginia.

In addition to providing asset protection, a DAPT offers other benefits, including state income tax savings when it’s used in a no-income tax state.

A DAPT is of no benefit until it’s funded with assets.  Trust assets typically include: (1) cash, (2) securities, (3) limited liability companies (LLCs), (4) business assets like intellectual property, inventory and equipment, (5) real estate, and, (6) recreational assets such as aircraft and boats.  Each asset under consideration for transfer into a DAPT must be evaluated from different vantage points, including its effect on: legal protection, taxation, business growth and potential future distributions to spouses and heirs.  Thus, the asset-transfer planning process is a critical area requiring the assemblage of a range of skills.

Foreign Asset Protection Trusts (FAPTs) are legal arrangements that involve transferring assets to an offshore jurisdiction with favorable trust laws. The primary purpose is to shield the assets from potential creditors, lawsuits, or other financial risks.  These trusts are governed by the laws of the country in which they are set up. Common countries for FAPTs include the Cayman Islands, Bermuda and the Cook Islands.  Foreign asset protection trusts can provide a higher degree of protection due to enhanced privacy and potential tax benefits available in the chosen jurisdiction.

Disadvantages of asset protection trusts include:

  1. High costs and complexity: Setting up an asset protection trust (APT) can be complex and costly.
  2. Lack of flexibility: Most APTs are irrevocable, making it difficult to remove assets once they are placed in the trust.
  3. Potential legal challenges:  While APTs provide strong protection, they are not foolproof.
  4. Impact on beneficiaries: APTs may affect a beneficiary’s access to assets.
  5. Other considerations include limited control over assets, regulatory compliance, taxation impact, and flexibility in asset management.

In summary, there are two kinds of irrevocable trust that work as asset protection vehicles: domestic asset protection trusts or foreign (offshore) asset protection trusts. APTs offer the strongest protection a business person can find from creditors, lawsuits, or any judgments against one’s estate. DAPTs offer the quickest, easiest and most flexible asset protection trust laws in the United States.

Contact our office for more help and info on this complex area of the law.