This is the seventh part in a series of blog posts that compare wills and trusts in the following areas: 1. Cost, 2. Post-Death Process, 3. Getting Money to Minors, 4. Maintenance, 5. Family Situation, 6. Taxes, 7. Asset Protection, 8. Later Acquired Assets.

Asset Protection

There are essentially two categories of asset protection trusts. Those that are irrevocable while you are living and those that are irrevocable once you’ve died. But let’s start by just defining what asset protection is. Essentially, asset protection, in the context of trusts, means distancing an asset of yours from yourself to such a degree that it is protected from various institutions or situations. 

The way this is done when you are alive, is by transferring assets to a trust that you no longer have control over. Someone else has to be in control of the assets and decisions regarding them. This usually means that the way in which you remain the beneficiary of these assets is impacted. The two most common asset protection trusts used in Utah are the Domestic Asset Protection Trust (DAPT) and the Medicaid Asset Protection Trust (MAPT). The DAPT is specially designed to help those with high liability professions AND with sizable assets, as an asset put into this type of trust is essentially no longer accessible. 

The MAPT is meant to preserve assets that otherwise would be countable by Medicaid and therefore spent down if an individual needed to receive long term care via Medicaid. However, this  also comes with the relinquishing of control of assets put into this trust. There is also a 5 year look back period where you cannot apply for Medicaid after establishing the trust. So, both have pros and cons and provide a kind of asset protection that wills cannot. 

One additional thought here– I often have clients concerned that if they don’t have estate planning in place, the government is just going to take their money.  This is usually a misunderstanding of the current tax thresholds or the Medicaid statute. It is true that if you use Medicaid (not to be confused with Medicare!) for assisted living/long term care, while  maintaining some assets, like a house, that the state Medicaid office will repay themselves in the form of a lien against your property, hence the attractiveness of the MAPT in this kind of  situation. Rest assured, the government never just keeps your estate money for their purposes; all the probate laws of the state are meant to get your estate assets to family members. 

The other kind of asset protection trusts occur after you die. These are irrevocable by nature and only trigger into existence once you have died. One is the Surviving Spouse Asset Protection (QTIP: Qualified Terminable Interest Property) and the other is the discretionary trust for beneficiaries. 

The first serves to put some limitations on a surviving spouse’s access to the funds that you’ve left: both on control and spending. As a result of these restrictions, there is built in asset protection from lawsuits as well. So for example, if assets were held in this kind of trust, and the surviving spouse got into a car accident and were sued as a result, the portion of assets held in this trust would not be subject to that lawsuit, since these assets would not be viewed as in the surviving spouse’s control. To get this benefit, however, there are restrictions that must be observed by the surviving spouse and even greater diligence on their part including added costs from attorneys and accountants. 

Similarly, discretionary trusts for beneficiaries when properly structured have the advantage of putting someone else in charge of the money left for a given beneficiary and protecting it from lawsuits as a result. 

Where minor kids are involved in the planning considerations, all Really Good Wills have these discretionary trusts built in for minor children. 

The post death type of asset protection can be included in wills or revocable trusts, but customized forms of these kinds of asset protection trusts are more typically found in revocable trust planning. So if asset protection is an important goal of your estate planning, then I would look into getting a revocable trust.  But as stated above and reiterated here, additional maintenance (and cost) will be required to structure assets so they qualify for this protection.  This is the same for both categories of asset protection trusts. 

Winner for Asset Protection: Revocable Trusts and Irrevocable Trusts