What is an Asset Protection Trust?
Asset Protection Trusts (APTs) are powerful tools that can help you safeguard your wealth from lawsuits, creditors, and other potential threats so you can ensure that your beneficiaries receive the full benefits of your hard-earned wealth. However, these specialized legal structures must be carefully created to ensure they meet your financial goals and comply with state laws. An experienced Arkansas estate planning attorney can explain how these trusts operate and help you determine if they are a good fit for your circumstances.
What Benefits Does an Asset Protection Trust Provide?
An APT is an irrevocable trust designed to shield assets from creditors and lawsuits. It legally transfers ownership of assets from an individual, referred to as the settlor or grantor, to the trust. The assets within the trust are then managed by a trustee for the benefit of designated beneficiaries. By relinquishing direct control over the assets, the grantor creates a legal barrier that makes it difficult for creditors to access them. However, the grantor may be named as a beneficiary of the APT, allowing them to receive funds from the trust.
APTs may deter costly litigation and influence settlement negotiations favorably, which may prove vital to protecting key assets for individuals in certain high-risk situations, such as:
- Doctors, lawyers, and other professionals who may be subject to lawsuits
- Business owners
- Individuals with high-value estates
While the primary purpose of an APT is to shield assets from creditors, it can also have other benefits. Like other types of irrevocable trusts, APTs can help your heirs avoid expensive probate proceedings and maintain a level of financial privacy regarding trust assets and beneficiaries. Additionally, APTs can be used for Medicaid planning if an individual is attempting to meet financial eligibility requirements.
Trusts are often viewed as separate legal entities for tax purposes, which can lead to substantial tax savings. For estates that exceed the federal estate tax exemption limit, irrevocable trusts like an APT can be particularly advantageous. Transferring assets into an APT effectively removes them from your taxable estate, potentially reducing or even eliminating estate taxes. This action may result in a larger portion of your wealth being passed on to your beneficiaries rather than being paid in taxes. However, consulting with a tax professional to learn how a trust could affect your tax burden is highly recommended.
What Are Common Types of Asset Protection Trusts?
Asset protection trusts come in many varieties and can be tailored to meet your specific needs. Working with a trusted lawyer and a financial advisor is essential to determine which APT best suits your situation. Common types of APTs include:
- Domestic Asset Protection Trust (DAPT): DAPTs are irrevocable trusts established within the United States that can shield assets from creditors while potentially allowing the grantor to retain some control over the assets
- Foreign Asset Protection Trusts (FAPTs): Also known as Offshore Trusts, FAPTs offer enhanced privacy and potential tax benefits. These trusts are established outside the United States, making them less susceptible to U.S. court judgments. However, FAPTs are typically much more expensive to set up and maintain than their domestic counterparts
- Medicaid Asset Protection Trust (MAPT): These trusts are designed to protect assets while maintaining eligibility for means-tested Medicaid benefits, particularly for long-term care. By placing assets in a MAPT, individuals can potentially qualify for Medicaid assistance without fully depleting their personal resources first. MAPTs may help safeguard important assets for future generations, even if the grantor requires expensive medical care
What Are the Requirements for a DAPT in Arkansas?
DAPTs only recently became available to Arkansas residents in 2023 with the passage of Act 291. With this legislation, Arkansas became the 21st state to allow self-settled asset protection trusts. A trust must meet the following criteria to qualify as a DAPT in Arkansas:
- Be structured as an irrevocable trust
- Contain Arkansas property or have an Arkansas settlor or trustee
- Not be created to hinder, delay, or defraud known creditors
- Give discretionary authority over distributions for the benefit of the settlor to a qualified trustee
What Should You Keep in Mind When Considering an APT?
APTs can be a valuable part of an overall strategy to maximize the value of the assets you leave for future generations, but it is essential to work with a skilled trusts attorney who can help you create a comprehensive wealth protection plan. Beginning the planning process before creditors are seeking access to your assets is crucial. Once creditors have a known claim against your estate, attempting to transfer assets to an APT could be considered a wrongful or fraudulent act.
Because the legislation allowing DAPTs in Arkansas is relatively new, these types of trusts have not been thoroughly tested against the legal claims of creditors in state courts. While DAPTs generally provide solid protection, there are still some slight risks. A knowledgeable attorney can help you explore ways to strengthen the effectiveness of your asset protection trust, such as structuring it as a third-party trust.
It is also vital to consider the downsides of creating a trust and whether it is necessary in your situation. Trusts can be costly to set up and maintain. Irrevocable trusts like APTs are also very challenging to change once created. Other options, such as directly gifting assets to your family members, may achieve similar outcomes without the expenses, and you may even have indirect access to the funds if your relationship with the individuals remains strong. However, for certain individuals, an APT’s legal and financial benefits can substantially outweigh the drawbacks.
How Can We Help You Leave a Lasting Legacy For Your Family?
A robust estate plan is one of the best gifts you can give your loved ones. By simplifying the asset distribution process through a well-structured trust, you can maximize your beneficiaries’ inheritances while minimizing the impact of circumstances that could reduce the value of your estate. APTs can protect your assets from frivolous lawsuits, Medicaid spend-down requirements, and other possible risks, giving you peace of mind.
At Big Rock Legacy Law Group, our experienced attorneys are committed to fully understanding your financial situation and goals so we can help you build an estate plan that safeguards your assets and family now and in the future. To discover how we serve you, contact our Little Rock office today at 501-988-3302 and schedule a consultation.
