August 01st - 4 minutes to read

What is a Protected Trust?

When it comes to asset protection, one of these irrevocable trusts could be your best option.

couple signing their asset protected trust
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Finding the right trust vehicle for your needs is as important of a decision as opting to set up a trust altogether. Many are surprised to find that some types of trusts don’t offer as much asset protection as they anticipate or need. Depending on your situation, a protected trust could better suit your needs and those of your estate and loved ones.

How Does an Asset Protection Trust Work?

An asset protection trust (APT) is one of the most powerful estate planning tools available. This trust can offer protection against future creditors, probate, lawsuits, and other judgment liens – but not existing or likely creditors or court orders. Assets held in this type of trust shouldn’t be used or distributed without a Trustee’s approval. Therefore, these are often created as irrevocable trusts. Individuals often fund their protection trusts with cash assets, securities, limited liability companies, real estate, business assets, and intellectual property.

APTs are a very complex form of trusts and are not the right solution for everyone. It’s best to consult with a legal counselor who specializes in trust and estate administration. Below we take a look into the pros and cons of three common protection trusts, so you can decide if one is right for you.

Domestic Asset Protection Trust

Domestic asset protection trusts (DAPT) have been permitted in Ohio since 2013. However, residents in any state may create an Ohio DAPT. In either case, state law also allows the trust creator (or settlor/grantor) to be the sole beneficiary or primary beneficiary.

To set up an Ohio DAPT, one must adhere to the following requirements:

  • Have a DAPT written out
  • Set up spendthrift provisions
  • Appoint at least one qualified trustee who is not the trust creator

Ohio DAPTs grant a decent amount of rights and powers to the trust transferor; e.g., they may receive and use assets, remove and appoint trustees and beneficiaries, manage distributions, etc. However, many restrictions and limitations exist with these types of trusts, most notably the lack of protection against all debts and court orders. For example, an Ohio DAPT does not exempt you from child or spousal support, alimony, or IRS obligations. For this reason, you may consider a foreign asset protection trust instead.

Foreign Asset Protection Trust

Foreign asset protection trusts are often known as “offshore” trusts, given that they are typically held in a jurisdiction outside of the United States, such as the Cook Islands. One of the primary benefits of these irrevocable trusts is their enhanced privacy protections over assets. Stricter privacy measures make it more difficult for others to learn the terms and assets of your trust. In addition, your trust is governed by the laws of the jurisdiction in which it is created. This means that what’s held within your trust typically will not be subject to U.S. judgments or court-ordered seizure of assets.

Foreign asset protection trusts offer a lot of protection, but they also come with a few considerable downsides. For one, holding assets in an offshore account does place them at risk against potential economic or political concerns. Not to mention, foreign protection trusts are very costly to set up, so for that reason alone, they are not recommended for everyone.

Medicaid Asset Protection Trust

This form of protection trust offers a much different benefit for relinquishing assets than the other two options. Individuals often opt for a Medicaid asset protection trust to reduce or eliminate the amount of assets in their name to become eligible for Medicaid. A common situation where this applies is when an individual would like to continue living in their primary residence or receiving income from investments, but doing so would jeopardize their Medicaid eligibility.

Is setting up an asset protection trust right for you? If so, which form of asset protection should you choose? Royal Oak Financial Group helps Ohio residents make these types of decisions and so much more. As you can see, creating an APT is a complex process, made more complicated by the fact that it is not a revocable living trust, and therefore much less amendable.

Set up a well-appointed trust for your needs with considerations to regulatory concerns. Schedule an appointment with us today to learn how to set up an asset protection trust in Worthington, OH.