Asset Protection Trusts (APTs)

Professions or businesses in certain industries, such as medicine, can be very lucrative. However, they can also be very vulnerable to economic fluctuations, or lawsuits if things go wrong. They can also sometimes be too lucrative, in that they disqualify a person from getting certain kinds of help when they need them most.

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As a form of insurance, people or companies may set up asset protection trusts—or APTs—to temporarily give legal control of some of their assets to a trusted confidant. This can protect those assets from being used to pay debts or legal settlements, or being counted against eligibility for certain government aid programs.

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This article will expand on what APTs are, including how they work, why they’re used, and what needs to be considered when looking to set one up.

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An asset protection trust is a financial arrangement where a person appoints someone (a trustee) to take legal ownership of some of their assets temporarily and to manage these assets on their behalf. The point is to avoid having to surrender these assets to creditors or because of litigation.

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An APT is usually a self-settled trust, meaning the creator and beneficiary are the same person. An APT is also a form of irrevocable trust. This means that, once it’s agreed to, its terms cannot be altered by the creator except under very special conditions. In contrast, a revocable (or “living”) trust can be modified by its creator at almost any time.

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A key difference between an asset protection trust vs. a living trust is that, as an irrevocable trust, an APT can protect assets from creditors or court rulings. A living trust can’t do this because of the degree of control the creator maintains over it.

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An APT has to be funded with assets. These include cash, stocks, LLCs, business assets, real estate, and luxury property (such as personal aircraft or yachts). But the process of putting assets in an APT is fraught with regulatory complications.

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For example, each asset has to be evaluated from a number of different viewpoints. How much of a person’s total assets will the APT protect from litigation or taxation? If corporate stocks and other assets are put into an APT, how will it affect the company’s ability to do business and grow? If something happens to the APT’s creator, can their family members access the assets?

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That’s why setting up an APT requires the help of financial planners, lawyers, insurance brokers, and other skilled financial and legal professionals. It’s also important to be able to trust these people, as the APT’s creator is essentially giving up legal control of their property to them.

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It’s up to the trustee—the person designated to manage the APT—to decide if and when ownership of the assets in the APT return to the creator, or are transferred to their family members (if something happens to the creator). Also, the APT’s creator can’t put assets in the trust and then turn around and sell them, spend them, or give them away except under very specific conditions.

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There are two general types of APTs: domestic and offshore. Each type has its pros and cons. In addition, some types of domestic APTs are used for specific purposes. We’ll explain a bit about each of them.

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Domestic Asset Protection Trust

A domestic asset protection trust is an APT registered in the federal (and, in some cases, regional) jurisdiction where the creator lives. In the US, domestic APTs are fairly new, so only certain states have laws that permit and regulate them. They are usually easier and less expensive to set up than their offshore counterparts.

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However, because domestic APTs are part of the legal system in the jurisdiction where the creators live—and, in the US’s case, they haven’t had many legal precedents set yet—their ability to effectively protect assets can be somewhat questionable. For example, stashing assets in a domestic APT when there are already outstanding legal claims against them will usually not protect them.

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Offshore Asset Protection Trust

Formally known as a foreign asset protection trust, this is an APT that is formed outside the federal jurisdiction where the creator lives. It’s usually much more expensive and complicated to set up than a domestic APT. In addition, a foreign APT is subject to the political, legal, and economic situations of the country where it’s formed.

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However, the latter can also be the big advantage of using an offshore asset protection trust. The country where a foreign APT is formed may have stricter privacy laws than the creator’s home country. This can make it more difficult for domestic authorities to find out what assets are held in the trust, what its terms are, or whether the trust even exists at all.

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Also, if the trust’s creator loses a domestic lawsuit where they’re ordered to surrender assets from their foreign APT, the country where the trust is held may not honor the ruling according to its laws. However, it may still cooperate in criminal investigations that involve assets in the trust.

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Veterans/Medicaid Asset Protection Trust

A veterans asset protection trust and a Medicaid asset protection trust are two specific types of domestic APTs that serve similar purposes. They are used to reduce the number of assets a person claims ownership of; this is done to avoid running up against eligibility limits for benefits from Veterans Affairs or Medicaid, respectively.

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There are certain limitations on creating these trusts, however, such as having to set them up a significant enough amount of time in advance before applying for benefits.

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When looking into how to set up an asset protection trust, you should know exactly what the intended use is, and research all of what that will entail.

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On the plus side, creating an APT not only protects certain assets from liability but also reduces the number of assets a person can claim to own legally. So there are certain situations where APTs are advantageous, such as:

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• Protecting assets from litigation: If a person puts assets in an APT and then is sued over a non-pre-existing unsecured debt or legal matter, the other party won’t be able to take assets from the trust as repayment if they win the lawsuit. Certain foreign APTs may even be able to protect assets from court rulings granting ownership of the assets to a person’s spouse in the event of a divorce, provided the assets were put in the trust a sufficient amount of time before the proceedings started.
• Avoiding litigation: Putting assets in an APT means a person or company has fewer assets they legally own, and can’t use those assets to pay off debts or lawsuit plaintiffs. This can deter plaintiffs from filing lawsuits against the entity in the first place, as they know they likely won’t gain enough from a favorable ruling to offset legal costs.
• Securing favorable settlements: By a similar token, consider if a plaintiff goes ahead with a lawsuit anyway, but the defendant gets them to agree to settle out of court. If the defendant holds most of their assets in an APT, they can likely negotiate to pay out less because they have fewer assets to give (i.e., that they legally control).
• Paying less tax: A person or company can store assets in a foreign APT created in a country with lower tax rates than their home country. This allows them to pay less tax on those assets, while also paying less domestic tax because they can claim to be legally in control of fewer assets. This has to be weighed against the cost of setting up the APT in the first place, though.
• Aiding eligibility for government benefits: Using an APT to reduce the number of assets a person legally controls can also be helpful if they’re planning to apply for government benefits in the near future. This helps them avoid having the value of those assets potentially disqualify them from being eligible for relevant programs.

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An asset protection trust has disadvantages as well, though. These include:

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• Limited availability: Not all kinds of APTs are available in all places. For example, in the US, domestic APTs are fairly new and—as of mid-2022—are only available in 17 states.
• Resource-intensive: Creating and maintaining an APT can be a costly, complicated, and time-consuming process that requires a lot of professional help. This is especially true of foreign APTs.
• Must be created in advance: In many cases, an APT must be established a significant amount of time before being used to apply for benefits, or before claims are filed against the creator.
• Irrevocable: Once the terms of an APT are set, it’s extremely difficult to change them except under very limited circumstances.
• Subject to jurisdiction’s political, economic, and legal scenarios: APTs are affected by the laws, economies, and politics of the country or other jurisdiction where they’re created. This can sometimes be a benefit, but it can also involve risks that could result in losing the assets or failing to have them protected.
• Sometimes requires business creation: Some countries’ laws require foreign APTs to be registered to a company instead of an individual. Setting up a business expressly for this purpose can complicate tax scenarios and defeat the purpose of using a foreign APT to pay less tax.

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Financial institution regulatory compliance teams should be aware of the existence of APTs, including how they work and what rules govern them in various places. APTs can be used legitimately by people and companies to ensure some of their assets aren’t vulnerable to financial or legal risk. However, they can also be used fraudulently to hide or deny assets from the people and organizations they’re owed to.

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Having a robust anti-fraud and anti-money laundering solution in place can help teams ensure they properly screen and account for APTs their clients may have, as well as ensure they are being properly used and managed.

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