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Unraveling asset protection trusts in California

On Behalf of | Jun 27, 2022 | Estate Planning |

One powerful estate planning tool you could have in California is an asset protection trust. But before you use it, it’s helpful to know how it works and if it fits your financial goals and unique situation.

Asset protection trust (APT)

An asset protection trust is an irrevocable trust that’s used to protect your assets from creditors, lawsuits, and other legal claims. The trustee of the trust manages the assets for the beneficiaries (you and your family). And if you’re ever sued or have a judgment against you, the assets in the trust are protected because they’re not considered part of your estate.

How APTs work

You can either choose between creating a domestic asset protection trust (DAPT) or a foreign asset protection trust (FAPT). DAPTs are created under state law. Unfortunately, in California, you cannot establish this trust for your own use but for the benefit of a third party like your children or other beneficiaries. FAPTs, on the other hand, are created under the laws of a foreign country. They are more effective in protecting your assets in California than their alternative; however, they come at a higher cost.

Considerations when setting up an asset protection trust

Asset protection trusts are still relatively new in California; thus, they may lack the credibility you may need to verify that they are perfect for your properties. However, before you create one, some of the few things to consider include:

• Ensuring that they are in line with your overall financial goals

• The specific circumstances that might affect you or your beneficiaries

• California state laws, especially with DAPTs

• The cost to set up and maintain

You should note that asset protection trust can also be revocable. But, if you still want to have some control over your assets while you live, with the costs and stringent laws in California, APT may not be ideal for you. This is because if a creditor wins a lawsuit against you, the court could order you to pay them from the trust that you are still considered the owner.