What Is An Asset Protection Trust?

Sarah RyanAccount Manager @ Lawhive & Non-Practising Solicitor

Updated on 7th March 2024

When you set up a trust, you put certain assets under the control of trustees for a specific purpose, usually for named beneficiaries.

Different types of trust are appropriate for different circumstances. Asset Protection Trusts are one of these.

In this article, we'll look at what an Asset Protection Trust is, how they work, and the benefits and potential drawbacks of using them in your estate planning efforts.

What is an Asset Protection Trust (APT)?

An Asset Protection Trust is a legal tool that can be used to make sure your assets are protected from threats, like creditors or soon-to-be ex-spouses or partners, and that they go to your loved ones when the time comes.

How do Asset Protection Trusts work?

In an asset protection trust, assets are transferred to a trustee who manages them for the beneficiaries based on a trust agreement. Here's how it works:

The person setting up the trust (the settlor) transfers assets like money, investments, property, or business interests into the trust. In doing this, legal ownership of the assets transfers from the settlor to the trust.

It is then the trustee's role to manage the assets in the trust, following the terms of the trust agreement. Trustees can be individuals, like family members, professional advisors, or a company.

Beneficiaries of an asset protection trust are the people chosen by the settlor to benefit from it. For example, dependent children, vulnerable or ill family members, or even close friends.

The trust agreement outlines the rules and responsibilities of the settlor, trustee, and beneficiaries. It also covers how assets are managed, distributed, and protected.

Common reasons for setting up an asset protection trust

The main aim of an asset protection trust is to safeguard assets from potential risks and liabilities.

Because the assets are held in the trust, and not owned directly by the settlor, they might be less vulnerable to seizure or loss in the case of legal claims or other problems.

Common reasons for setting up an asset protection trust include:

• Protecting assets in case of divorce.

• Shielding business assets from liabilities.

• Safeguarding assets from creditors.

• Estate planning and creating a legacy for future generations.

• Managing taxes.

• Ensuring the privacy of financial matters.

Asset protection trusts can be personalised to offer different levels of flexibility and control over the assets held in the trust. Depending on the terms of the trust agreement, the settlor may retain certain powers, like changing trustees, adjusting the terms, or benefiting from the trust assets in certain situations.

What is the role of a trustee in an asset protection trust?

In an asset protection trust, the trustees are responsible for:

• Managing the trust assets and acting in the best interests of the beneficiaries.

• Following the terms of the trust agreement.

• Keeping accurate records of all trust transactions, like income, expenses, distributions, and investments.

• Communicating with beneficiaries and addressing inquiries about the trust.

• Making investment decisions on behalf of the trust, following the terms and applicable laws.

What types of assets can be protected in an asset protection trust?

Some common types of assets that can be held in an asset protection trust include:

• Cash and bank accounts.

• Investments, like stocks, bonds, mutual funds, and other investment securities.

• Property including residential, commercial, and rental properties.

• Business assets.

• Personal property like artwork, jewellery, collectibles, vehicles, and other assets .

• Intellectual property such as patents, trademarks, copyrights, and trade secrets .

• Life insurance policies and death benefits.

• Pensions.

• Inheritance assets or funds received as an inheritance.

Asset protection trusts are permanent and binding. That means, once you transfer an asset into the trust, the trust becomes the legal owner of the asset and it can't be seized by external parties under any circumstances.

It's important to carefully consider the types of assets to be protected and get professional advice from a solicitor and a financial advisor when setting up an asset protection trust.

What are the benefits of an asset protection trust?

When you put assets into an APT they are protected from potential creditors or legal action. Other benefits are:

1. You can still use assets in the trust, like living in your home.

2. They can avoid probate in some circumstances.

3. They offer tax benefits if set up correctly and legitimately.

4. They can protect your beneficiaries' inheritance from unforeseen events like legal claims on your estate.

5. They don't usually affect a beneficiary's eligibility for benefits.

What are the drawbacks of an asset protection trust?

Legal challenges

First and foremost, if a trust is seen as an attempt to avoid debts or financial obligations, it may face legal challenges. In some cases, establishing an asset protection trust before facing financial troubles, sickness, or needing care could be seen as an attempt to hide assets or as deprivation of assets.

Loss of control

When you transfer assets to a trust, you give up direct control over them to the trustees. What's more, some asset protection trusts restrict access to assets during your lifetime, which may impact your financial situation if things change.

Tax implications

Asset protection trusts can also have tax consequences for both settlors and beneficiaries.

For example, transferring assets into a trust could trigger Capital Gains Tax if the transfer is treated as a disposal for tax purposes. Or, assets held in trust could be subject to income tax, with the trustees being responsible for reporting and paying the tax on any trust income.

Lots of people also use asset protection trusts to save on inheritance tax, which is possible. however, poorly executed trusts may not achieve the intended tax savings, and assets placed into them may still be subject to IHT if certain conditions are not met.

Can an asset protection trust protect assets from care fee assessments?

When you establish an asset protection trust and transfer assets into it, in theory, those assets shouldn't be included in care fee assessments or inheritance tax calculations.

However, if you create an asset protection trust trust shortly before needing care, it might be seen as depriving yourself of assets. This means you purposely transferred assets to the trust to avoid using them for care fees.

Local authorities will look at these trusts during care fee assessments to determine if assets were intentionally transferred to avoid care fees. If they find evidence of this, they may still consider those assets in the financial assessment, especially if future care needs were foreseeable when the trust was established.

In recent years, it has come to light that lots of retirees were misled to believe that asset-protection trusts and schemes would safeguard their homes in case of long-term care needs.

While, when used legitimately alongside a will, asset protection trusts can ensure property is managed according to your wishes they are not intended to be a solution to save on future care costs.

How can a solicitor help in setting up an asset protection trust?

If you're considering setting up a trust, a wills, trust, and probate solicitor can help you determine if an asset protection trust is right for you. As we've explored above, there are many nuances and fine details to consider, and you must understand the legalities involved and any possible risks.

In some cases, an asset protection trust may not be suitable for your needs and goals, in which case a solicitor can provide a personalised recommendation considering important factors like your assets, potential liabilities, family situation, and financial goals.

If you decide to set up an asset protection trust a solicitor will prepare all the necessary legal documents, including the trust agreement, making sure they accurately reflect your intentions and comply with legal requirements.

To get advice on asset protection trusts or begin the process of setting one up, contact us today for a free case evaluation and fixed-fee quote for the services of our expert lawyers.

How does an asset protection trust impact inheritance tax?

If set up legitimately, assets transferred into an asset protection trust may be removed from the settlor's taxable estate for inheritance tax purposes. This can help reduce potential IHT liabilities and preserve wealth and legacy for beneficiaries.

However, similar to care home fee assessments, assets put into an asset protection trust for the express purpose of avoiding or reducing inheritance tax may be included in the valuation of an estate during probate if the action was viewed as a deliberate deprivation of assets.

Therefore, it is not recommended you set up a trust for the sole purpose of shielding assets from tax liability, especially if you anticipate you may die within seven years of doing so, as it might not have the effect you wanted.

What is the difference between an asset protection trust and a will?

Asset protection trusts and wills serve different purposes and operate under different legal frameworks.

Asset protection trusts aim to safeguard assets during the settlor's lifetime and beyond, shielding them from creditors, legal claims, divorce settlements, and potential tax liabilities.

In contrast, wills focus on asset distribution after the testator's death. They outline beneficiaries, guardianship arrangements for minor children, and the executor's responsibilities for administering the estate.

In an asset protection trust, assets are transferred into the trust during the settlor's lifetime, placing them under the trustee's ownership and management.

Wills, on the other hand, only become effective when the testator dies and assets are transferred to beneficiaries following the probate process, which validates the will and distributes assets according to its instructions. Until the testator dies, however, assets remain under their legal ownership.

Can an asset protection trust be established for business assets?

Yes, an asset protection trust can be established to protect business assets. 

Business owners often use asset protection trusts as part of their overall estate planning and asset protection strategies to safeguard business assets from various risks and liabilities.

Asset protection trusts can hold various types of business assets, including property equipment, inventory, intellectual property, business interests, and financial accounts. The specific assets transferred into the trust will depend on the nature of the business and the owner's objectives.

The type of asset protection trust and its structure may vary depending on the business's legal structure. For example, owners of sole proprietorships, partnerships, LLCs, or corporations may establish different types of trusts tailored to their specific business needs and circumstances.

How can Lawhive help?

We all want to do what we can to protect our hard-earned personal wealth and make sure those we love are taken care of both in our lifetimes and beyond.

Setting up an asset protection trust can be an effective way of doing this, alongside a valid will. At Lawhive, our wills, trust, and probate lawyers can help you do both and provide personalised advice for your unique needs and circumstances, giving you peace of mind for the future.

Contact our legal assessment team today to learn more about how you may benefit from an asset protection trust and how our asset protection lawyers can help you.