Building wealth is often a primary goal of any long-term financial plan, but simply owning valuable property without adequate safeguards can leave that property vulnerable to loss. Creditors, lawsuits, and certain government claims can erode even the most carefully built estate if assets are not protected. One effective legal tool for safeguarding property is an asset protection trust. With that in mind, the Los Angeles attorneys at Schomer Law Group, APC explain how different types of asset protection trusts function and what you should know before creating one.
Common Types of Asset Protection Trusts
Asset protection trusts come in several forms, each with distinct purposes, governing laws, and potential benefits. Understanding the differences will help you determine which type, if any, is best suited to your goals. Common types of asset protection trusts include:
- Special Needs Trust: Parents or guardians of a child with special needs often wish to provide ongoing financial assistance after the child becomes an adult; however, giving money or property directly can unintentionally disqualify the individual from important public benefit programs such as Supplemental Security Income (SSI) or Medi-Cal. A special needs trust offers a solution by holding and managing funds for the benefit of the disabled person without those funds being counted toward resource limits for government programs. This ensures that the beneficiary can receive supplemental support while maintaining eligibility for critical assistance.
- Medicaid Asset Protection Trust: For many California residents, the high cost of long-term care becomes a major concern in later years. Eligibility for Medi-Cal (California’s Medicaid program) is partly based on the value of an applicant’s non-exempt assets. A Medicaid asset protection trust can transfer ownership of certain assets, so they are not counted for eligibility purposes. It is important to remember that the “look-back” period for Medi-Cal is currently 30 months in California, meaning asset transfers within that timeframe may still affect eligibility.
- Domestic Asset Protection Trust (DAPT): Domestic Asset Protection Trusts are trusts created under the laws of certain U.S. states that provide strong asset protection benefits. California does not currently recognize DAPTs under its own statutes. As a result, residents seeking the benefits of this type of trust typically need to establish it in a state that does, such as Nevada or Delaware. The rules governing DAPTs, including which creditors can still access the trust’s assets, vary by state. In most cases, obligations such as child support, spousal support, and certain government claims remain enforceable against trust property.
- Foreign Asset Protection Trust: Also known as an “offshore trust,” a foreign asset protection trust is created under the laws of a country outside the United States. Jurisdictions such as the Cook Islands, Nevis, and Belize are well known for having statutes favorable to asset protection. These trusts can provide a high level of protection against domestic judgments, but they also come with higher costs, complex administration, and potential risks from political or economic instability in the chosen country. Furthermore, compliance with U.S. tax and reporting requirements remains essential.
Factors to Consider Before Establishing an Asset Protection Trust
While asset protection trusts can offer strong safeguards, there are several important factors to weigh before creating one, such as:
- Existing Claims: A significant limitation is that most trusts will not shield property from existing claims. For example, if you are already facing a lawsuit or have an outstanding judgment, placing assets in an asset protection trust after the fact is unlikely to stop creditors from pursuing those assets. Courts may view such transfers as fraudulent if made with the intent of hindering existing claims.
- Look-Back Periods: When it comes to Medicaid asset protection trusts, timing is also critical. California’s 30-month Medi-Cal look-back rule means that transfers made within two and a half years before applying for benefits may result in a period of ineligibility. Proper planning well in advance of needing care is essential to avoid these penalties.
- Stability: For foreign trusts, it is crucial to have a thorough understanding of the governing laws of the chosen jurisdiction as well as the overall stability of the political climate. While these trusts can provide strong protection from certain legal actions in the United States, they may also involve legal systems unfamiliar to most Americans. Changes in a foreign country’s political climate or financial regulations could impact the stability of your trust.
- Control: One of the most important aspects of any asset protection trust is its irrevocable nature. Once assets are transferred into the trust, the Grantor cannot take them back at will. This relinquishment of direct control is what allows the law to treat the assets as belonging to the trust, not the individual, thereby placing them beyond the reach of most creditors. While irrevocability can feel restrictive, it is also what gives the trust its strength as a protective tool.
An asset protection trust can be a valuable part of a well-structured estate plan for California residents, particularly for those with significant assets or exposure to potential liability. Because these trusts involve complex legal and financial considerations, working closely with an experienced estate planning attorney is essential.
Do You Have Additional Questions about Asset Protection Trusts in California?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about asset protection trusts in California, contact the experienced Los Angeles estate planning attorneys at Schomer Law Group APCby calling (310) 337-7696 to schedule an appointment.
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