Keeping Your Stuff Safe: Trusts for Protecting Your Assets

In today’s world, safeguarding what you’ve worked hard for is crucial. That’s where asset protection trusts come in, like domestic asset protection trusts (DAPTs) and Medicaid asset protection trusts (MAPTs). These trusts are used to protect your assets as a part of your estate plan. But remember, how well these trusts work depends a lot on the laws where you live. So, it’s smart to talk to a lawyer who knows about this stuff before making any big moves.

What Are Asset Protection Trusts?

Think of asset protection trusts as safety nets for your stuff. They’re legal setups designed to hold onto your assets and keep them safe from things like future unanticipated lawsuits and creditors. Before we go any further though, it is very important to understand that proper, lawful asset protection with trusts or otherwise is NOT about hiding assets. It is about lawfully arranging one’s assets as a part of your estate plan to provide protection for the inheritance to be received by your loved ones. Here’s a breakdown of two types of lifetime asset protection trusts.

Domestic Asset Protection Trusts (DAPTs)

DAPTs are irrevocable trusts set up right here in the US and are ruled by state laws. They’re all about protecting your assets from future, unanticipated creditor/predator claims. What makes them special is that you, the person who sets up the trust (we call you the settlor, or grantor, or trustor), can still benefit from the assets and income produced by the assets during your lifetime. There are generally limitations on this which can and should be evaluated with your asset protection attorney, and a separate Trustee is likely needed, but nonetheless, the benefit usually exists to some extent. Additionally, the person who sets up the trust can also often times reserve powers to retain some control even with the existence of a separate Trustee. For example, the settlor may be able to reserve the power to veto distributions, or remove and replace trustees.  It’s like having your cake and eating it too—you get protection but still have some say over your assets.

Medicaid Asset Protection Trusts (MAPTs)

MAPTs are irrevocable trusts that shield assets from being eaten up by the high costs of long-term care, especially for older folks. With the price of long-term care going up, it’s a big worry for many families. MAPTs let you transfer your assets into a trust while eventually still qualifying for Medicaid to cover your long-term care bills. All that being stated, the rules here are complicated as there is a 5 year “look-back” period for Medicaid eligibility during which time if a gift or transfer for less than fair market value is made, including a transfer to the trust, a penalty period (i.e. a period of time that Medicaid won’t pay for long-term care) is imposed. Additionally, the devil is in the details with these kinds of trusts, and unlike the DAPT, the Settlor cannot have any beneficial interest in the principal of the trust (and in some states, the Settlor cannot have a beneficial interest in income either). Nonetheless, the proper use of a MAPT may be a way to keep your assets safe for your loved ones while making sure you can still afford the care you need.

How State Laws Come into Play

Not to beat a dead horse, but remember, the rules for these trusts vary a lot depending on where you live. Each state has its own laws about trusts and how much protection they offer. Some states have really good laws that make it hard for creditors to touch your trust assets. Others might have rules that aren’t as strong. In fact, many states don’t have DAPT legislation which does not prevent a resident from “forum shopping” and creating a DAPT under another state’s laws, but this can present challenges to the asset protection features of the trust in the event that there is litigation subject to the resident state’s laws. And when it comes to Medicaid, as indicated previously, the eligibility rules can differ too. So, it’s important to know what the deal is in your state.

Why You Need Legal Advice

Because this stuff can get pretty complicated, it’s smart to talk to a lawyer who knows all about trusts, estate planning, and asset protection. They can look at your situation and help you figure out the best plan for keeping your wealth safe. They’ll consider things like your finances, family, and what you want for the future. Plus, they can help you pick the best place to set up your trust, taking into account things like taxes and laws that affect asset protection.

Wrap Up

Asset protection trusts like DAPTs and MAPTs are like insurance for your assets, keeping them safe from the perils that life throws your way. But remember, the rules can change depending on where you live, so it’s always best to talk to a lawyer who knows the ropes. With their help, you can build a plan that protects what matters most to you and your loved ones. So don’t wait—start securing your family’s financial future today!