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How to Cultivate Financial Wellness Across Generations
EP Wealth’s Rich DeRafelo, CFP®, shares how families can prepare the next generation to manage wealth with education and growing financial...
Explore how asset protection trusts may help safeguard wealth from legal risks and support multigenerational planning as part of a broader estate strategy.
Using Asset Protection Trusts to Shield Family Wealth
Preserving wealth across generations often involves more than growing investments—it also means planning for potential risks that could disrupt long-term goals. For families with complex holdings, high visibility, or professional liability exposure, asset protection can be an important consideration within a broader estate planning strategy.
Among the tools that may be worth exploring, Asset Protection Trusts (APTs) are designed to help safeguard assets from future claims or legal disputes. They are not a one-size-fits-all solution, but in the right context, they can contribute to a more structured and resilient approach to wealth transfer.
Some strategies that may be used in conjunction with asset protection trusts include:
- Transferring assets to a trust in a jurisdiction with favorable statutes
- Separating personal wealth from business-related risks
- Establishing independent oversight through a third-party trustee
- Integrating APTs with other estate planning structures like family limited partnerships
- Aligning trust provisions with long-term gifting or generational transfer goals
What Is an Asset Protection Trust?
An asset protection trust is a type of irrevocable trust designed to hold and preserve assets outside of an individual's direct ownership. Once assets are transferred to the trust, they are generally managed by a third-party trustee according to the terms laid out in the trust agreement.
Unlike revocable trusts, which offer no legal barrier between the individual and their assets, APTs may provide a layer of protection under specific legal conditions. They’re often used to help reduce exposure to potential future liabilities, whether personal, professional, or related to high-risk investments.
Types of APTs
There are two primary categories:
- Domestic APTs – These are established in U.S. states with favorable trust laws, such as Nevada, Delaware, or South Dakota.
- Offshore APTs – These are formed in jurisdictions outside the U.S., such as the Cook Islands, Nevis, or Seychelles, and can involve more complexity and regulatory scrutiny.
Each type comes with different legal requirements, costs, and administrative expectations. The choice between them depends on multiple factors, including asset location, risk tolerance, and legal considerations.
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How Asset Protection Trusts Can Help Shield Family Wealth
Asset protection trusts are not designed to hide wealth or avoid legitimate obligations. Instead, they may serve to:
1. Limit Exposure to Litigation or Professional Liability
Professionals such as physicians, attorneys, or business owners may use APTs to distance personal assets from potential claims related to their work. This approach requires that the trust be funded well in advance of any known issues.
2. Preserve Assets for Future Generations
APTs can help structure the transfer of assets in a way that reduces the risk of loss through divorce settlements, creditor claims, or lawsuits involving beneficiaries. When coordinated with long-term gifting plans, they can complement multi-generational strategies.
3. Separate Personal Wealth from Business Risk
For individuals involved in closely held businesses or real estate ventures, APTs may help keep personal holdings insulated from liabilities that arise within business entities or partnerships.
4. Integrate with Broader Estate Planning Structures
Asset protection planning doesn't exist in a vacuum. Trusts can be used alongside family limited partnerships, irrevocable life insurance trusts, or charitable giving vehicles to support multiple planning objectives.
Considerations When Establishing an APT
Setting up an asset protection trust involves legal, financial, and practical considerations. The following factors are often central to the process:
Timing of the Transfer
Transfers into an APT must be made proactively. If a trust is created or funded after a liability becomes foreseeable, courts may determine the transfer was made to defraud creditors—reducing or eliminating the trust's effectiveness.
Jurisdiction Selection
Different states and countries offer different levels of protection. States like Nevada and South Dakota have statutes specifically designed for asset protection trusts. Offshore jurisdictions may provide additional layers of legal complexity and separation, but with higher costs and regulatory requirements.
Type of Assets Transferred
Commonly transferred assets include:
- Marketable securities
- Real estate not tied to active business operations
- Interests in limited partnerships or LLCs
- Cash or liquid accounts held separately from operating businesses
Assets must be retitled in the name of the trust, and there may be implications for tax reporting, estate valuation, and income distribution.
Trustee Selection
Choosing a trustee can directly affect how the trust is viewed in legal proceedings. An independent or institutional trustee is often preferred, as self-trusteed APTs may face greater scrutiny.
Legal and Tax Implications
Although APTs may limit creditor access to assets, they do not exempt the grantor or beneficiaries from tax obligations. Several important points to consider include:
- Gift Tax Exposure: Transferring assets into an irrevocable trust may trigger gift tax reporting, especially if the trust is structured for the benefit of others.
- Income Tax Reporting: Trust income may still be taxable, depending on how distributions are handled and whether the trust is considered a grantor or non-grantor trust.
- Coordination with Estate Strategy: APTs should align with existing estate documents and charitable strategies to potentially avoid conflicting provisions or unintended outcomes.
Working with an Advisor: A Coordinated Approach
An asset protection trust is not a standalone solution; instead, it works as a component of a broader estate and wealth planning framework. While attorneys draft and structure the trust, financial advisors can play a key role in helping clients evaluate whether an APT fits their goals and in managing the financial elements surrounding the trust.
An advisor may assist by:
- Evaluating whether a trust fits within your risk exposure and liquidity needs
- Coordinating with your attorney and CPA to align timing, valuation, and reporting
- Reviewing how the trust interacts with your broader estate planning structure
- Helping track and manage assets held in trust, including investment oversight or income planning strategies
As with any advanced planning tool, the effectiveness of an APT depends on how well it fits into the bigger picture. Choosing to explore one should be part of a thoughtful, multi-disciplinary process that accounts for legal, financial, and long-term family considerations. Contact an EP Wealth advisor near you to learn more.
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