An asset protection trust is a trust that is intended to protect assets and property from future creditors. As part of preparing an estate plan, an individual decides what happens to his or her property after he or she passes away. The individual must also decide on how the property transferred to the trust will be held and managed during his or her lifetime. This may include a desire to protect certain assets and property from future creditors by creating an asset protection trust.
To understand what an asset protection trust is, it is important to understand what a trust is and how it works.
What is a trust?
A trust is an arrangement or agreement to accept and hold property for the benefit of another. Generally, trusts used in estate planning can be categorized into two (2) main categories: revocable or irrevocable.
- Revocable trusts: A revocable trust is a type of trust that allows the creator of the trust (known as Grantor, Trustor, or Settlor) to maintain control and decision-making authority over the trust and its assets. With a revocable trust, the Grantor retains full control and authority over the trust.
The Grantor also has an unrestricted right to make changes to the trust as desired. Revocable trusts are also commonly referred to as living trusts or family trusts. These types of trusts are not intended to be used for purposes of asset protection.
- Irrevocable trusts: An irrevocable trust is a type of trust that limits or restricts the control and decision-making authority of the Grantor. The limitations and restrictions vary depending on the purpose of the trust. Irrevocable trusts are often used to protect assets from future creditors and are also used for Medicaid planning. Asset protection trusts fall into this category.
The type of trust used in planning an estate will depend on the type of assets owned by the individual, his or her long-term goals, and his or her purposes for preparing an estate plan.
Why use an asset protection trust?
An asset protection trust is a trust established for the purpose of limiting an individual’s liability. It also serves to protect specific assets from potential creditors.
Generally, the Grantor accepts certain limitations on how much control and decision-making authority they have over a specific asset. In exchange for limited control, the asset is protected from the reach of potential creditors that may normally expose the asset to a financial judgment or collection lawsuit by a creditor.
Additionally, an asset protection trust may be used in Medicaid planning to prevent the individual from having to liquidate all of his or her assets prior to being able to receive Medicaid benefits to help cover expenses related to a medical condition or long-term nursing home care.
When should I consider an asset protection trust?
You may consider setting up an asset protection trust if you have assets of significant value that you would like to protect from potential creditors or from being sold to satisfy costs and expenses related to a medical condition or long-term nursing home care.
This may also be a wise option if you intend to make a large or important purchase, such as a vacation or rental property, if you own a business for which you must personally guarantee loans on behalf of the business, or merely to protect your assets in case of an unexpected event that affects your financial situation, such as a car accident, loss of employment, a disability, or unexpected medical expenses. Likewise, if you work in a high-liability profession, such as engineering or contracting, you may want to get an asset protection trust in case you ever get sued.
How does an asset protection trust work?
An asset protection trust is a legal entity that is separate from the Grantor and is effective upon its creation. In order for the trust to be effective, an asset must be properly transferred and titled under the trust before it is considered part of the trust and entitled to protection.
As part of transferring the asset into the trust, the Grantor agrees to give up his or her individual control and ownership of that asset. Instead, the asset is to be held, controlled, and distributed by the trustee as provided in the trust agreement. In most cases, an individual’s creditor can only gain access to assets controlled by the individual; therefore, the less control you have over an asset, the more protection you will have from a creditor.
When the Grantor transfers the asset to the asset protection trust, he or she releases his or her control and ownership of the asset. If an asset is properly transferred to an asset protection trust and the provisions of the trust are followed, the transferred asset is no longer considered the Grantor’s and cannot be reached by a creditor to satisfy a judgment or other financial obligation. It is also no longer considered an asset for the purpose of qualifying for public benefits, such as Medicaid.
In some cases, and depending on the desired level of protection, an individual may still have limited involvement in the management and distribution of assets. Those limits, however, often prevent the individual from making a distribution of assets of the trust directly to himself or herself without the approval and consent of another.
When considering an asset protection trust, it is important to remember that it can only protect assets from future creditors. Likewise, for purposes of Medicaid eligibility, any transfer made within five years of an application for benefits may prevent your eligibility. Therefore, it is extremely important to plan ahead if you want to apply for these benefits.
How does an asset protection trust help an individual qualify for Medicaid?
An asset protection trust is also sometimes referred to as a Medicaid Trust because it can help an individual qualify for Medicaid in a similar manner that it protects an asset from the reach of creditors. Medicaid will not count an asset that has been properly transferred to an asset protection trust if your control and ownership of the assets are properly restricted.
Setting up an asset protection trust for the purposes of qualifying for Medicaid or other public benefits may prevent you from having to liquidate assets before qualifying for benefits.
An asset protection trust can be extremely useful when planning for an unknown future and protecting your family. There are many different options to consider when preparing an estate plan. The expertise of a good estate planning lawyer can help you make the best decision when it comes your situation and ensure your estate plan is the right fit for you and your family. If you do not have an estate plan or if your current estate plan needs to be reviewed or updated, you should speak with an estate planning attorney. Contact one of our experienced lawyers today by calling or texting 801-544-5306 for a free consultation.
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