The most common asset protection trust is the domestic asset protection trust because it’s easy to set up. But there are other types that you will discover in this guide and the advantages and disadvantages that come with choosing some of them in protecting your assets and estate.
Comparison Between Revocable and Irrevocable Trusts
An asset protection trust can be either revocable or irrevocable. Each has its benefits and downsides depending on the level of protection you need to put on your estate. Here is what exactly each one of them means.
Revocable Trust
A revocable trust is one whose conditions you can change as long as you are alive and of sound mind. It becomes irrevocable once you are not alive, and no changes can be made. The ability to change it gives you control of the trust, but once you fund it, you seize to be the owner, but the trustee.
Advantages
1. They give your loved ones an easy time once you are gone since they don’t pass through the probate process.2. They don’t require originals for validation since the probate process is eliminated.
4. Their management goes on without interruption regardless of your incapacitation status, which is only applicable if you have already funded the trust.
Disadvantages
1. The revocable trust does not protect your assets from creditors and judgments when you are alive.2. They do not save you money from estate and income tax; hence no tax advantage.
3. Retitling is time-consuming for those assets that require titling.
4. Unlike wills, they need updates from time to time that can automatically update under certain major life events, like divorce.
Irrevocable Trust
It is difficult for the irrevocable asset protection trust to amend, change or terminate its details once you sign it. However, you can make changes on an irrevocable trust under very few special circumstances. However, the changes you make must also be approved by the named trustees.
Advantages
1. They protect your assets from creditors and judgments.2. Estate tax benefits for assets over the $11,580m thresholds are subject to federal tax.
3. Easy access to government benefits like Supplemental Security Income and Medicare
Disadvantages
1. They are associated with complex terms that may be difficult to understand.2. Filing additional tax returns is an additional cost that comes with irrevocable trusts.
3. They are taxed separately and at a higher rate.
Types of Asset Protection Trust
There are various types of asset protection trusts, and they can range from domestic asset protection trusts to foreign asset protection types. Three of the major ones include
Foreign Asset Protection Trust – it’s also referred to as the offshore trust. It offers more privacy and enhanced tax benefits, but this comes at a higher cost, and it can be established outside the U.S.
Domestic Asset Protection Trust is easy to set up for states that allow such trusts. Its major downside is the lesser foolproof in comparison to the foreign trust.
Medicaid Asset Protection Trust - this trust eliminates your high-value assets from being counted in your estate’s total value, hence increasing your Medicaid eligibility.
Choosing The Right Asset Protection Trust
Choosing the right asset protection trust from the above details depends on the value of your assets. Other important aspects include the level of privacy and how much control you need over your assets when you are still alive.
