When putting together your estate plan, one of your biggest concerns may pertain to wealth preservation. Though you may have done everything right in your life when it comes to saving, paying off your debts and honoring your financial commitments, there is still the risk that your estate will become the subject of a lawsuit, judgment or collections actions. 

Traditional estate planning vehicles allow you to do a lot of things, but preserving your wealth in the face of legal action is not one of them. An asset protection trust, on the other hand, offers robust protection against creditors and legal pursuits and can even deter costly litigation before it begins. 

Understanding asset protection trusts

According to Investopedia, an asset protection trust is an estate planning vehicle that allows the grantor to name him or herself as a beneficiary so that he or she can continue to access the funds and property during his or her lifetime. When structured properly, this type of self-settled trust protects property from creditors and judgments. It also offers certain tax benefits, such as income tax savings. 

APTs are complex and come with numerous regulatory requirements. For instance, only 17 states currently recognize them, Tennessee being one of them. APTs are also irrevocable, and they allow only for occasional distributions, which must occur at an independent trustee’s discretion. Moreover, each APT must contain a spendthrift clause, which dictates if, how and when a beneficiary may spend, sell or give away trust assets. 

Domestic APTs

There are two types of APTs: Domestic and foreign. Of the two, domestic APTs are the easiest to set up and offer the most flexibility. However, because the concept of an asset protection trust is fairly new, and because the majority of states do not recognize them, assets within them can still become subject to federal bankruptcy laws, liens, court orders and judgments if you are not careful. Moreover, APTs lack the authority of established case law, which could prove devastating in the face of a judgment or lawsuit against your estate.