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Understanding Asset Protection Trusts

Like many people, you may devote considerable time and efforts to building up your asset portfolio. While amassing assets may be an understandable goal, failing to protect those assets can effectively make reaching that goal pointless. Fortunately, there are several estate planning tools that can be used to protect assets, including a variety of asset protection trusts. To help ensure that your assets are protected, a Murfreesboro estate planning attorney at Bennett | Michael | Hornsby explains what you need to know about asset protection trusts.

Frequently Used Asset Protection Trusts

You should consult with your estate planning attorney to determine what type of asset protection trust works best in your estate plan; however, it helps to gain a basicTennessee child support attorney understanding of some frequently used asset protection trusts, such as:

  • Domestic Asset Protection Trusts. As the name implies, a Domestic Asset Protection Trust (DAPT) is one that is established within the United States. State law governs whether a DAPT can be established and/or recognized within a state as well as what the rules are for creating or enforcing a DAPT. As of 2022, just over one-third of the states allow Domestic Asset Protection Trusts, including Tennessee. 
  • Foreign Asset Protection Trusts. A foreign asset protection trust, commonly referred to as an “offshore trust,” is a trust that is set up outside of the U.S. and is governed by the laws of the country in which the trust is set up. Although a foreign asset protection trust can be established in any country, countries with laws that are friendly for foreign asset protection trusts include Belize, the Cook Islands, and the Cayman Islands.
  • Medicaid Asset Protection Trusts. A Medicaid planning component within a comprehensive estate plan often includes a Medicaid asset protection trust. Medicaid eligibility — which may become crucial in your later years to cover the high cost of long-term care – will depend, in part, on the value of your assets. A Medicaid asset protection trust shields non-exempt assets, meaning they will not be counted for Medicaid eligibility purposes.
  • Special Needs Trust. If you have a child with special needs, you may wish to continue financially supporting your child when he/she becomes a legal adult. Directing providing assets or money, however, can jeopardize your child’s eligibility for critical government assistance programs such as Medicaid and SSI. A special needs trust can protect assets designated for the support of your child by preventing those assets from counting against your child for eligibility purposes. 

What Else Do I Need to Know about Asset Protection Trusts?

The right type of asset protection trust can go a long way toward protecting your hard-earned assets; however, there can be disadvantages to establishing an asset protection trust.

One potential disadvantage to most DAPTs is that establishing one will not protect assets from claims that already exist at the time the trust is created. For example, if you have an existing judgment for money owed on a credit card or car loan, establishing a DAPT will not usually prevent the creditor from getting at the trust assets. You must also be mindful of rules such as the Medicaid five-year look-back rule that allows Medicaid to consider asset transfers that occurred within the previous 60 months when you apply for benefits. In addition, most state laws allow for certain “exempt” creditors who can still reach assets held in a DAPT. Typically, exemptions include the state/federal government, a spouse in a divorce, and debts owed for alimony or child support.

Foreign asset protection trusts also come with a few important disadvantages, not the least of which is the cost of establishing and administering one. Because you are dealing with the laws of a foreign country, you must also understand those laws and be certain they will protect your assets. Moreover, assets held in a foreign country are vulnerable to political or economic instability within that country.

Finally, an asset protection trust is irrevocable. The irrevocable nature of the trust is what provides the asset protection because the law considers assets to be owned by the trust (not by you personally) once those assets are transferred into the trust.

Contact a Murfreesboro Estate Planning Attorney 

If you have additional questions or concerns about incorporating an asset protection trust into your estate plan, consult with an experienced Murfreesboro estate planning attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.


Dinah Michael