Asset Protection Trust – What Does It Do?

An Asset Protection Trust is intended to shield assets from creditors or other forms of litigation. The goal is to provide asset protection for the beneficiaries that could be available from giving those same assets to your beneficiaries outright. The process of protecting assets starts with a purposefully drafted trust.  Next, the trust is funded with assets. Then, the game plan is implemented by the trustee.

While a beneficiary’s creditors cannot reach the assets held in the asset protection trust, they may be able to access certain distributions when made by the trustee to the beneficiary.  As a result, the trustee cannot make a distribution of cash or property to the beneficiary without putting the distribution at risk of being reached by a current or future creditor of the beneficiary. 

However, in some cases, the beneficiary’s spouse may not be at as high of a risk of being subject to creditors’ claims.  For example, the spouse may not be in a profession that is at high risk for lawsuits. 

By allowing the trustee the flexibility to make a distribution to the beneficiary’s spouse, the trustee can keep the assets in the beneficiary’s family, but potentially keep them out of the reach of the beneficiary’s creditors. On the other hand, this is not a failsafe plan, as the spouse may be subject to the same creditors’ claims if the couple has joint debt, and there is the risk that the beneficiary and spouse will divorce. 

As a result, an asset protection trust must be drafted to allow a trustee the opportunity to carefully consider all circumstances.