Asset Protection Trust

An asset protection trust, commonly referred to as an APT, is an estate planning vehicle that protects a person’s assets from creditors. Asset protection trusts are complex financial tools that are best established with the help of a qualified financial advisor.

Kim Borwick, Financial Editor for Annuity.org
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    Kim Borwick

    Kim Borwick

    Financial Editor

    Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for Annuity.org.

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    Emily Miller
    Emily Miller, Managing Editor for Annuity.org

    Emily Miller

    Managing Editor

    Managing editor Emily Miller is an award-winning journalist with more than 10 years of experience as a researcher, writer and editor. Throughout her professional career, Emily has covered education, government, health care, crime and breaking news for media organizations in Florida, Washington, D.C. and Texas. She joined the Annuity.org team in 2016.

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  • Financially Reviewed By
    Michael J. Boyle, M.S.
    Michael J. Boyle

    Michael J. Boyle, M.S.

    Former Compliance Professional

    Michael J. Boyle began his career in the securities business in 2011 as a registered financial professional. Over his tenure, he’s worked with asset classes including equities, fixed income, CDs, mutual funds, futures, options and foreign currency.

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  • Updated: September 12, 2022
  • This page features 7 Cited Research Articles
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APA Borwick, K. (2022, September 12). Asset Protection Trust. Annuity.org. Retrieved September 23, 2022, from https://www.annuity.org/retirement/estate-planning/asset-protection-trust/

MLA Borwick, Kim. "Asset Protection Trust." Annuity.org, 12 Sep 2022, https://www.annuity.org/retirement/estate-planning/asset-protection-trust/.

Chicago Borwick, Kim. "Asset Protection Trust." Annuity.org. Last modified September 12, 2022. https://www.annuity.org/retirement/estate-planning/asset-protection-trust/.

The key benefit of an asset protection trust is the protection it provides against creditors. In addition to this protection, domestic APTs that are created in a state that does not have a state income tax allows the trustor — i.e., the person whose assets are held in the trust — to avoid state income tax.

In addition to protection from creditors, asset protection trusts can shield your assets in the event that you file bankruptcy, get divorced or have a lawsuit filed against you.

What Is an Asset Protection Trust?

An asset protection trust is a trust that has been set up with the specific purpose of protecting the trustor’s assets. Most beneficial to the wealthy, APTs are funded with cash, real estate, business and recreational assets, LLCs, and securities.

Employer-sponsored retirement plans, such as 401(k) plans, and most IRAs are protected under federal law in cases of bankruptcy, so assets held in these qualified accounts are safe without being held in an APT.

These types of trusts are also referred to as “self-settled” trusts or spendthrift trusts, meaning a trust created by an individual for his or her own benefit.

Transferring assets to an asset protection trust is a highly complex strategy that requires the expertise of financial planners, lawyers and insurance brokers. These professionals must consider a number of estate planning factors in addition to the legal protection the APT provides.

These include the tax treatment of the assets held in the trust, their growth potential and future bequests to the trustor’s heirs.

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Domestic and Foreign APTs

There are two types of asset protection trusts: domestic and foreign. Foreign APTs are also referred to as “offshore” APTs because they are often held in offshore accounts.

As of 2022, there are 18 states that allow asset protection trusts. Trusts are generally governed by the states, so laws vary depending on the state in which a domestic APT is set up.

States that permit APTs include:
  • Alaska
  • Delaware
  • Hawaii
  • Michigan
  • Mississippi
  • Missouri
  • Nevada
  • New Hampshire
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Utah
  • Virginia
  • West Virginia
  • Wyoming

The drawbacks to domestic APTs include their being subject to liens and judgments, as well as to bankruptcy and state laws.

Foreign, or offshore, APTs, on the other hand are often held in jurisdictions that do not adhere to U.S. regulations regarding these trusts. Such jurisdictions are referred to as “offshore tax havens” and maintain strict privacy policies.

Irrevocable Trust

Regardless of whether the asset protection trust is established within the United States or abroad, it must be an irrevocable trust. This means the assets in the trust are owned by the trustee. As such, the trustor — also known as the settlor or the grantor — has no control over them.

Therefore, if a creditor files a lawsuit against the trustor and wins, the assets in the trust will not be considered part of the trustor’s estate and will be protected from a court order giving the creditor an interest in the assets.

Beware of Foreign Trust Schemes

The IRS warns of foreign asset protection trusts that are part of abusive foreign trust schemes. According to the IRS, abusive trust tax evasion schemes are designed to “hide the true ownership of assets and income or to disguise the substance of transactions” so that they appear to be legitimate trusts. In reality, though, the taxpayer still controls his or her assets, which means they may be seized and sold to satisfy liabilities.

Promoters of these schemes charge up to $70,000 for their foreign packages.

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Medicaid Asset Protection Trust

Medicaid sets asset limits to determine an applicant’s eligibility. These limits vary from state to state. A Medicaid asset protection trust allows an applicant to meet these eligibility requirements by reducing the value of his or her assets.

According to the American Council on Aging, “adult children and other relatives can be named as trustees,” but they must follow rules that prohibit them from using trust funds for themselves.

As is the case with other types of asset protection trusts, Medicaid APTs must be irrevocable. Furthermore, the trustor cannot be named as the beneficiary.

Because Medicaid enforces a policy, called the “look-back period,” intended to deter applicants from giving away assets in order to be eligible for the program, applicants must establish a Medicaid APT at least five years prior to applying for benefits.

In addition to preventing the trustor from having to “spend down” assets to qualify for Medicaid, a Medicaid asset protection trust protects the assets from the Medicaid Estate Recovery Program, which is mandatory in all 50 states and exists to recoup the money the state spent on the Medicaid recipient after his or her death.

Having a Medicaid APT ensures that the trustor’s assets will go to his or her beneficiaries and not to the state.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: September 12, 2022

7 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. American Council on Aging. (2019, March 28). How Medicaid Planning Trusts Protect Assets and Homes from Estate Recovery. Retrieved from https://www.medicaidplanningassistance.org/asset-protection-trusts/
  2. American Council on Aging. (2020, January 2). Medicaid Estate Recovery Programs: When Medicaid Can and Cannot Take One’s Home. Retrieved from https://www.medicaidplanningassistance.org/can-medicaid-take-my-home/
  3. Cornell Law School. (n.d.). Secured transactions. Retrieved from https://www.law.cornell.edu/wex/secured_transactions
  4. Internal Revenue Service. (2020, January 16). Abusive Trust Tax Evasion Schemes - Facts (Section I). Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-facts-section-i
  5. Internal Revenue Service. (2020, January 16). Abusive Trust Tax Evasion Schemes - Facts (Section IV). Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-facts-section-iv
  6. Kohler, M. (2022, July 18). When to Use the Domestic Asset Protection Trust (DAPT). Retrieved from https://markjkohler.com/when-to-use-the-domestic-asset-protection-trust-dapt/
  7. Texas Health and Human Services. (n.d.).Your Guide to the Medicaid Estate Recovery Program. Retrieved from https://hhs.texas.gov/laws-regulations/legal-information/your-guide-medicaid-estate-recovery-program