The term “asset protection trust” isn’t really a legal term, so when someone uses it, you always have to question what the person is talking about. It would have to be an irrevocable trust, because revocable trusts don’t offer any asset protection. Yes, that includes land trusts.
There is a type of trust commonly known as an “asset protection trust” that is created under the laws of one of the eight or so states that have passed “asset protection trust laws.” Trusts created under these laws are known as asset protection trusts, legacy trusts, heritage trusts, Alaskan trusts, and a dozen other names. The “Alaskan Trust” is kind of a generic name for this type of trust, because Alaska was the first state to create laws that addressed these types of trusts. I will address the Alaska type trusts later in this article.
In any case, a trust which hopes to offer asset protection will have to be irrevocable. Other than the Alaskan type trusts, it is basically illegal to create what is called a “self-settled trust.” (See my YouTube on this at https://youtu.be/6n01pMdskW8.) More or less, you CANNOT create a trust that is irrevocable and protected from your creditors where you get all or part of the benefit of the assets held in the trust. If you get the benefit of the assets held in the trust, your creditors should be able to get the benefit of those assets too.
There are a couple of problems that come into play when you create and fund an irrevocable trust. First, you have to realize that the assets you place into the trust are not yours anymore. You have irrevocably given them to the trust and indirectly to the beneficiaries of the trust. If the trust is intended to remove the assets from your estate for estate tax purposes, you need to give up all “incidents of ownership” (control directly or indirectly) over those assets and the trust. The trust usually can’t be amended. As far as you are concerned, those assets are gone. You gave them away.
The word “gave” is a key word. Transfers to an irrevocable trust are generally considered a “gift” and the value of the gift is subject to the gift tax laws. You can give the “annual exclusion” amount without paying a gift tax (approx. $14,000). Anything above that will be taxed and eat away at your lifetime exemption amount (approx. $5.5 million). When the exemption amount was a lot lower, the gift tax was a big deal for many folks. Now it isn’t a big deal for most folks. There are lots of rules that have to be followed, if you want to make your gift to the irrevocable trust qualify for the annual exclusion. For example, you have to issue Crummey Letters to each beneficiary and comply with the Crummey rules.
If you don’t care about estate tax issues and the only purpose of the irrevocable trust is asset protection, you can have more control over the trust and the assets, but you can’t be a beneficiary. The short story is that society and the laws have decided you can’t use an irrevocable trust and get the benefit of the assets and protect the assets from your creditors.
The Alaskan type trusts were created basically to get assets under management in the state where the trust is created. Alaska had to do something in 1997 to get more money in its banking system (the bank had to be the trustee), and so they passed a law that said you could create a self-settled trust. There were lots of restrictions. The trustee had to be an Alaskan entity. The assets really weren’t protected until after a waiting period. The waiting period today ranges from 3-5 years depending upon which state laws you are creating the trust under. Utah probably has the best asset protection trust laws. The assets in a Utah Asset Protection Trust can be protected from creditors in a little as 90 days. Yes, I am in Utah and could help with the trust if you need help.
The Alaskan type trusts are often called legacy trusts, because many of the laws will allow the trust to go on for 999 years. That is ludicrous. Columbus discovered the Americas only 500 years ago, and you are going to have the vision to govern your assets for 1000 years? I don’t think so.
States which have asset protection trust laws include:
ALASKA COLORADO DELAWARE HAWAII MISSISSIPPI
MISSOURI NEVADA NEW HAMPSHIRE OHIO OKLAHOMA
RHODE ISLAND SOUTH DAKOTA TENNESSEE UTAH VIRGINIA WYOMING
There is a lot of controversy as to whether the asset protection trusts established in one state will protect assets from creditors in another state. It gets into the Full Faith and Credit issues established in the Constitution, public policy laws in the various states, and lots of other sticky issues.
The bottom line is, an irrevocable trust can provide asset protection, but not if you are getting any benefits from the assets you put into the trust. The asset protection trusts established in a few states are still largely unknowns in the legal system. So let’s use LLCs and other legal tools instead to reliably get the asset protection you want.
P.S. Yes, there are offshore asset protection trusts. I say no. The French term is “hell no.” The government has been going after these in a big way, so they are more of a liability than they are worth. Don’t do it.