Pros and Cons of an Asset Protection Trust

Note that it is less costly to set up an asset protection trust in the U.S. than it is to create a foreign asset protection trust. Because these trusts are fairly new, the case law concerning their treatment is constantly evolving, which adds a level of uncertainty to their ability to properly protect assets. Most states have a limitation period during which assets transferred into such a trust remain vulnerable to creditors.

Foreign asset protection trust

The foreign asset protection trust, also known as an offshore trust, provides more effective protection for your assets. Such trusts are established in jurisdictions outside of the U.S., such as the Cook Islands, which provide more stringent protection for trusts and their assets. Because your trust is in a foreign jurisdiction, it's governed by the laws of that jurisdiction rather than by U.S. laws.

Although they are usually more costly than their domestic counterparts, foreign asset protection trusts generally have more stringent privacy measures, making it harder for others to learn the trust terms and assets. Another benefit is that jurisdictions that promote themselves as offshore trust havens usually do not enforce U.S. judgments against assets of trusts formed in their jurisdiction.

In many cases, assets of a foreign asset protection trust are held in an offshore account. While this provides more protection from a U.S. court-ordered seizure of assets, it does expose the assets to potential economic and political risks associated with the jurisdiction in which the offshore account is held.

Medicaid asset protection trust

While one of the primary purposes of an asset protection trust is to protect the settlor's assets from creditors' claims, such a trust can also be used to help make you eligible for Medicaid by reducing the assets in your name. If you are planning to set up a trust for this purpose, it's important to consult with an adviser with experience in this area, as not every trust can help you comply with Medicaid's eligibility requirements.

An asset protection trust can be a vital estate planning tool. Because it's crucial for such a trust to be set up properly, consult with an adviser with expertise in asset protection matters.