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What should I know about an asset protection trust?

On Behalf of | Dec 13, 2023 | Estate Planning

Setting up a trust allows you greater control over how you can distribute your assets. However, trusts come in different forms. Some trusts do not shield assets if you become the target of a lawsuit. Fortunately, an asset protection trust may be an option for you.

As of 2023, 20 states allow for residents to establish an APT, with Oklahoma included in this category. For residents concerned about safeguarding their wealth, an APT offers security along with other benefits.

Domestic asset protection trusts

Domestic APTs allow individuals to maintain some control over the trust while still protecting assets placed inside it. As the trust creator, you can receive income distributions from the trust. You may also direct investment decisions and distributions made by the person you appoint as trustee. However, you relinquish outright ownership and control over the assets themselves to the trustee.

Once established, a domestic APT makes trust assets unavailable to satisfy court judgments from creditors and civil lawsuits. However, APTs are subject to state laws concerning how long they must have existed before they protect assets. Also, some creditors, such as a divorcing spouse, might still be able to access trust assets in some cases.

Medicaid asset protection trusts

A Medicaid APT is primarily for Medicaid eligibility and planning. These trusts exclude assets for the purposes of Medicaid means testing while shielding them from estate recovery claims after death. The assets also remain available to help supplement long-term care costs not covered by Medicaid. However, you must establish a Medicaid APT at least five years before applying for benefits.

Potential benefits

Effective wealth protection planning is a popular reason to establish an APT. Property placed inside maintains its value while remaining inaccessible to satisfy legal judgments. APTs also avoid estate taxes and provide an additional layer of privacy over individually owned assets. However, an APT is irrevocable, so you cannot abolish it or remove assets from it once you have created it.

An APT can be an optimal estate planning tool in some situations. It is even possible to create a foreign-based APT, though such trusts are subject to the country in question. Still, given that you surrender much control over your assets in an APT, you should examine your priorities to ensure that an APT is the best choice for your estate plans.