Our NY Estate Planning Lawyers Discuss How to Avoid Mistakes When Establishing an Asset Protection Trust
Asset protection trusts are incredibly flexible tools that serve many purposes, from shielding assets against unfounded creditor claims to protecting Medicaid benefits. However, these trusts can be complex—and any mistake, no matter how minor, could cost whatever protection you’d hoped to gain. 
You don’t have to take chances with your assets. Here, the skilled estate planning attorneys of Landskind & Ricaforte Law Group, P.C. discuss asset protection trusts and what they can and cannot do.
What to Know About Asset Protection Trusts
An asset protection trust APT) is used to shield bank accounts, real properties, and personal possessions from potential creditor claims. Sometimes termed “spendthrift trusts,” these tools offer enhanced protection against future financial crises.
In New York, the three most common types of asset protection trusts include:
- Offshore asset protection trusts
- Domestic asset protection trusts
- Medicaid asset protection trusts
Every type of asset protection trust is irrevocable, meaning that its terms cannot be easily revised or amended. Aside from this common feature, asset protection trusts are flexible instruments that have many different applications.
Holding Assets Overseas: Offshore Asset Protection Trusts
An offshore asset protection trust (OAPT) holds assets overseas.
If properly configured, an OAPT can offer grantors several levels of protection. These include the following:
- A near-total separation of your personal possessions from your trust-controlled assets
- The peace of mind that comes from knowing that your trust is outside the territorial and political jurisdiction of American courts and the U.S. government
- Pro-wealth policies that shift the burden of proof onto creditors
Offshore protection trusts are legal so long as they’re properly configured, but they aren’t ideal for New Yorkers who need more flexibility or hope to retain uninterrupted access to trust-controlled assets.
Establishing a Domestic Asset Protection Trust
A domestic asset protection trust (DAPT) usually names its grantor as a beneficiary.
However, New York places more restrictions on DAPTs than many other states. If you establish an irrevocable trust, you cannot typically name yourself as a beneficiary—but you can still configure your DAPT to provide long-term protection for your family.
You can, for instance, use a DAPT to:
- Retain control over trust assets while acting as a discretionary beneficiary
- Structure trust distributions to limit how much money beneficiaries receive at once
- Divorce-proof DAPT-controlled assets that are being held for the benefit of somebody other than yourself
Establishing a Medicaid Asset Protection Trust
A Medicaid asset protection trust (MAPT) is almost always formed for a single purpose: ensuring that a family doesn’t have to give up their life’s savings to afford long-term care or assisted living.
Establishing a MAPT could let you meet Medicaid’s strict income limits while still:
- Living in your own home
- Retaining the right to use and access trust-controlled assets
- Pass trust-controlled assets to your heirs as part of their inheritance
However, Medicaid asset protection trusts only work when they’re formed in advance. If you try to establish a MAPT shortly before applying for Medicaid benefits, any transfers you make to your trust could be used to disqualify you and reject your application.
New York Asset Protect Trusts: Critical Mistakes to Avoid
An APT can serve as an effective tool for keeping your assets safe from uncertainty, but establishing an APT is anything but straightforward. Here are five common mistakes to avoid before and after forming a trust:
1. You Don’t Fund the Trust Properly
Trusts only serve their intended purpose when they’re properly funded. An APT can be funded with almost any conceivable asset, including the following:
- Real properties
- Financial accounts
- Life insurance policies
- Art collections and other valuables
- Personal possessions and household wares
However, re-titling assets to an APT can be difficult—especially if the trust is located in another city, state, or country. Failing to fund the trust or making a mistake during transfer processes risk every protection an APT could otherwise provide.
2. You Choose the Wrong Trustee
Your trustee is the person or party appointed to manage the trust’s assets.
Many people try to limit the risk inherent to irrevocable living trusts by playing it safe and naming a spouse, a sibling, or another family member as a trustee, but problems could arise if:
- The trustee doesn’t have the experience or knowledge needed to manage complex assets
- The trustee doesn’t have the time needed to give the trust the attention that it deserves
- The trustee doesn’t know how to defend the trust and its assets from creditor challenges and other potential obstacles
Additionally, naming a spouse or other close relative as a trustee could risk violating state and federal law on fraudulent transfers.
3. You Don’t Comply With State and Federal Law
If you establish an APT in New York, your APT must consider both state and federal law. Common mistakes include the following:
- Trying to name yourself as the direct beneficiary of an APT
- Failing to report the interstate and overseas transfer of certain types of assets
- Attempting to form a trust for the sole purpose of avoiding a court order, known creditors, or an impending judgment
4. You Misunderstand the Power of an APT
As powerful as APTs may be, they are not a cure-all solution. APTs have limits, and any misunderstanding of these limits could void their advantages.
5. You Try to Establish a New York Trust Without Obtaining Legal Counsel
Anyone who tries to establish a trust without an attorney runs the risk of invalidating their own estate plan, but APTs present far more opportunity to inadvertently overlook law, precedent, and theory.
Strategies For Avoiding Common Trust Challenges
Be Sure to Fund Your Trust the Right Way
Your trust is valid only if it’s funded. In general, funding a trust involves:
- Identifying the assets you need to protect
- Obtaining the right documents for your assets and re-titling them to the trust or the trustee’s name
- Accounting for the costs of daily or routine trust administration
- Establishing protocols to review trust assets and receive regular updates and reports
Even after your trust has been funded, you’ll almost certainly need to conduct regular reviews—especially if your trust is in another state or a different country. Federal law and international treaties can change with little warning, and transfers that were legal when you formed your trust could be subject to new requirements.
Be Sure to Nominate a Responsible Trustee
Your trustee is the person or people responsible for ensuring that your trust reaches its goals and fulfills its intended purpose. The ideal trustee should be somebody who:
- Knows how to work with assets like yours
- Has the resources and the willingness to consult outside experts in times of crisis
- Will respect your feedback while you’re still alive and honor your intent after you’re gone
Finding the right trustee for an offshore or out-of-state trust could be more challenging, as your trustee should be familiar with the laws of your jurisdiction and those of whichever territory the trust is located within.
Be Sure to Discuss Your Goals
Before hiring an attorney or signing a retainer agreement, schedule a consultation to talk about the following:
- The reasons you’re forming an APT
- What you hope to achieve by establishing a trust
- Your long-term aims and aspirations
An experienced trust administration attorney could help you explore your options. This may mean following your existing plan to the letter or recommending a solution you haven’t yet considered.
Consult the Landskind & Ricaforte Law Group, P.C. Before Making a Commitment
The Landskind & Ricaforte Law Group, P.C., has spent years helping families in every borough protect their legacies from uncertainty. Our experienced team of asset protection trust lawyers could help you identify and realize the solutions that work best for you.