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Asset Protection vs. Living Trust

Asset Protection vs. Living Trust

When estate planning, it can feel overwhelming trying to figure out the best methods to use. Two common approaches people take toward managing their assets are a living trust and an asset protection trust, and each offers something different.

What is a Living Trust?

A living trust is a way to transfer your estate and is created during a person’s lifetime to help manage their assets. The owner (grantor) transfers their property or assets into a trust and names a trustee who ensures proper allocation to named beneficiaries after the grantor dies.

The grantor still manages their assets and takes payments from any income generated. The most common type used in estate planning is a revocable living trust, meaning the grantor can make any changes to the trust during their lifetime.

Pros and Cons of Living Trusts

Advantages of a Living Trust

  • Helps avoid probate: If you only use a will, when you die all your assets go through probate which can be costly and take a long time. By using a living trust, you can largely avoid probate for any assets that were named in the trust.
  • Changeable: If you use a revocable trust, you can change (or cancel) it at any point during your lifetime. You can move assets in and out, change or add beneficiaries, or change your trustee.
  • Privacy: When a will goes through probate, all its contents become publicly accessible, so any details about your wealth or property can be seen by anyone. A living trust is not public.
  • Less likely to be challenged: Although trusts can be contested in court, this is less likely than with a will.

Disadvantages of a Living Trust

  • Debt can affect payouts: Even with a living trust, the court can still order that the assets be used to pay outstanding claims and debts which will reduce the total amount your beneficiaries get.
  • Doesn’t protect the grantor during their lifetime: Because you are still able to manage and collect payouts on your assets while they’re in the trust, they are also vulnerable to dips in the market, losses, and requests by creditors or litigation.
  • Inconvenient for selling assets: When assets are tied up in a trust it can make it harder to sell them since you’ll always need your grantor’s approval to do so.

What is an Asset Protection Trust?

An asset protection trust (APT) is the strongest trust you can use to guard your assets against creditors, lawsuits, or liabilities. By putting named assets into an irrevocable trust and naming someone else as the trustee, the assets are no longer connected to your name and therefore cannot be pursued by creditors.

Different types of Asset Protection Trusts

  • Domestic: Domestic trusts are set up in the U.S. in one of 17 states that currently allow them. You do not have to live in the state the trust originates in.
  • Foreign: Foreign trusts, sometimes called offshore trusts, are set up in a foreign jurisdiction and are therefore subject to that country’s laws. These typically provide more privacy and security against creditors or lawsuits, and many commonly used countries do not honor U.S. judgements.
  • Medicaid: A Medicaid trust is a type of domestic trust set up with the specific goal of qualifying for Medicaid. If your current assets don’t allow you to qualify for Medicaid, you can move some into a trust to reduce your total reportable wealth.

Pros and Cons of Asset Protection Trust

Advantages of an APT

  • Asset Protection: Like the name implies, an APT offers the best protection of your assets available.
  • Privacy: When you move your assets into a trust, the trustee becomes the legal owner and your name is no longer associated with the assets which increases your privacy. You can add another layer of privacy by first moving assets into an LLC before a trust.
  • Provides for beneficiaries: When you protect your assets during your lifetime, you know your beneficiaries will be getting the full amount you left them and are in no danger of having their inheritance used to pay down debt or settlements.

Disadvantages of APT

  • Irrevocable: The biggest drawback of APTs is that it’s an irrevocable trust that can’t be changed. Once you fund the account by moving your assets over, you cannot change your mind or take the asset out.
  • Expensive: Because they are generally more complex documents, APTs are more expensive to have drawn up and maintained than living wills.
  • Usually requires assistance: Most people will need to retain the help of a good estate attorney and a financial planner when planning, setting up, and funding an APT.

Asset Protection Trust vs Living Trust

Both an APT and a living trust can provide for your family after you die and ensure your assets are allocated according to your wishes. Both also offer more privacy of your financial details and will help to avoid probate. The biggest difference between the two is that a living trust cannot protect your assets during your lifetime like an APT can. Assets held in living trusts are susceptible to litigation and creditors whereas an APT guards against this, making an APT a better choice for asset protection.

How to Start a Trust to Protect Your Assets

If you’re interested in including a trust as a part of your estate plan, it’s highly recommended you seek the counsel of an estate attorney. Living trusts are more straightforward than APTs, but both will be easier to complete with legal help. A good attorney can tell you what type of trust works best for your needs and can draw up the necessary documents so you won’t run into legal obstacles down the road.

If you are interested in forming an APT it may be worth your time to speak with different attorneys in the states where APTs are allowed to review all your options. Each state will have slightly different requirements and tax laws.

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