Asset Protection Trusts And How They Work To Protect Your Wealth

Asset Protection Trusts And How They Work To Protect Your Wealth

For most people, thinking about their family’s financial future is something they usually take seriously. Given the number of years of working hard and building up your wealth, it’s always your wish to transfer everything you’ve built to your family members in case of incapacity or death.

However, there are situations wherein some creditors will run after your assets to satisfy a monetary obligation. In such a case, your family can no longer inherit everything you want them to have. Fortunately, there are plenty of ways to get rid of this problem, and these can include the establishment of asset protection trusts.

Keep reading this article to learn more about asset protection trusts and how they can help protect your wealth.

Asset Protection Trusts And How They Work To Protect Your Wealth

What Are Asset Protection Trusts?

Asset protection trusts refer to a financial protection planning tool that you can use against creditors, judgments, and lawsuits. In other words, they can help put off a lawsuit before it starts to ensure more favorable outcomes for you and your family’s financial future.

But, to better understand what asset protection trusts are and how they work, you should first familiarize yourself with the different types of this financial planning tool. These can include:

  • Self-Settled Trust – A self-settled trust is an agreement in which an individual or company signs a form of contract that allows an agent of the business to sell a particular asset for a specific price in case of death or disability of the person signing the contract.

For example, if a non-custodial parent of a child is left financially responsible for the child’s education, it’s possible for the child’s guardian to sell the assets of the custodial parent to pay for that education. If the non-custodial parent’s income is insufficient to pay for the child’s education, the guardian can, then, purchase those assets for the amount of education that wasn’t paid for by the non-custodial parent. This setup is often called ‘self-settled’ because the individual or entity who’s purchasing the asset is legally bound to pay the costs of the education.

  • Domestic Asset Protection Trust – The second type of asset protection trust is called a domestic asset protection trust. This type of asset protection trust requires two parties to agree to the plan.

For example, in a domestic asset protection trust, the custodial parent has the ability to enter into an agreement with a trustee, who pays the cost of education for a minor child. If the custodial parent dies or becomes disabled, the trustee can sell the child’s assets to pay for medical expenses and education.

Dealing with either one of these trusts can be a challenging experience. With all the things that need to be considered along the way, it’s best to seek legal help from an asset protection attorney who can guide you throughout the process.

How Can Asset Protection Trusts Work To Protect Your Wealth?

As mentioned, asset protection trusts are considered a financial planning tool that can be used to shield your wealth from creditors and lawsuits. Because of the legal structure of these trusts, it can be difficult for the other parties to run after your assets under these accounts. In short, anyone who has an interest in your wealth will have trouble winning claims against your assets. As a result, asset protection trusts can help avoid legal cases and offer a good opportunity for settlement agreements rather than dealing with complicated court processes.

However, asset protection trusts aren’t only used for personal asset protection. They can also be used in the following manner:

  • Tax Neutrality – Compared to other financial planning tools, asset protection trusts (ATPs) aren’t recognized as a distinct and separate taxable entity. This means that setting up an ATP is completely tax neutral and will not accumulate additional taxes aside from your current tax obligations. That’s because the income of the assets placed under the trusts is directly reported to the beneficiaries for tax purposes.
  • Estate Planning – Given the uncertainties of life nowadays, thinking about estate planning can be an excellent idea to guarantee the financial future of your family members in case of your death. This is where asset protection trusts come into play. These trusts are also known for being an estate planning tool. Under this legal structure, the trustee will be responsible for protecting your assets and ensure they’re passed on to your heirs after death. This setup can give you peace of mind, knowing that everything you’ve worked for will be used by your family for their future.

Final Thoughts

With the information presented above, there’s no doubt that asset protection trusts can provide strong asset protection against any potential risks. While the process of setting up trusts can be complicated, it doesn’t have to remain that way as long as you hire a lawyer who specializes in financial and estate planning. With them on your side, you’ll better understand how ATPs can benefit you and your assets.


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