Do I Need An Asset Protection Trust?

An assest protection, also known as a creditor avoidance trust, is a type of trust that protects your money from creditors and lawsuits.

An asset protection trust is irrevocable, meaning it cannot be undone once you fund it.

HOW IT WORKS

An asset protection trust is an irrevocable trust that you put money into and essentially cannot touch for the remainder of your life. There is a 5-year loookback for debts and lawsuits, meaning the trust needs to be in existence for 5 years before you incur the debt or liability that you’re shielding against. An asset protection trust will not protect you from existing debt.

There are “Domestic Asset Protection Trusts” which are a type of asset protection trust that allows you to still retain some control over your money.

DO I NEED ONE?

An asset protection trust will come in handy if you’re ever sued for an enormous amount of money, or if you owe an enormous amount of debt.

Besides those two scenarios, asset protection trusts aren’t really going to help you.

For regular folks who own a house and some wealth, I typically don’t recommend asset protection trusts. I also view this through a unique lens because unlike most estate planning attorneys, I also do bankruptcies and debtor representation. Most estate planning attorneys don’t know the practical implications of being sued into bankruptcy, they only know the theoretical “what ifs.”

You can’t anticipate if you will be sued into bankruptcy, but you can take prophylactic measures to lower your chances.

For example, the number one cause of bankruptcy in America is health care debt.

By having good insurance and doing your best to avoid life altering accidents, the chances of you being sued into bankruptcy are not an impending reality for most Americans.

In the event you are sued for a bankrupting amount of money, you’re allowed to keep your house if you live there. Creditors cannot touch a homestead.

Nevertheless, many people are anxious about these possibilities.

My advice would be this: If you’re balking at the price of an asset protection trust ~$2,000- $5,000, you probably don’t need one.

Most people who get asset protection trusts have a lot of money and only put some of their money into the trust. For example, if they’re worth $2m, maybe they’ll put $1m or $500k into an asset protection trust just on the off chance they get sued into bankruptcy before they die, or their estate gets sued by the nursing home, etc…

The bottom line is this: have good health insurance, good car insurance (underinsured and uninsured as well), and take care of yourself.

If you’re still anxious at the thought of bankruptcy, then you can protect your wealth with an asset protection trust.

Generally, I recommend a will, living will, and a power of attorney for most folks. For wealthier individuals or individuals who own a lot of property, I’ll talk to them about trusts and asset protection trusts, etc.