An asset protection trust (APT) is a lawful estate planning vehicle designed to shield assets from unknown future creditor claims, lawsuits, or judgments by placing those assets in a trust governed by enforceable spendthrift protections. Depending on the structure, an APT can let the settlor benefit from trust assets while reducing the risk that creditors can reach them. APTs range from offshore structures to Domestic Asset Protection Trusts (DAPTs) which are legal in certain states.
How Does an Asset Protection Trust Work?
The trust agreement and the controlling jurisdiction determine how protection works. Asset protection trusts are irrevocable, meaning the settlor gives up direct ownership and cannot amend or revoke the trust on her own. Asset protection trusts also include spendthrift clauses which prevent beneficiaries’ creditors from seizing trust distributions directly.
Many states require trustees to be independent and be located in a protective jurisdiction, or certain trust administration steps must be taken in order to qualify for protection. Timing is essential for APTs, and transfers must be made well before any known or reasonably foreseeable creditor claims, otherwise they will be reversed as fraudulent transfers.
Domestic vs. Offshore Asset Protection Trusts
Seventeen U.S. states have enacted statutes allowing domestic self-settled asset protection trusts. These laws vary by state in scope, required formalities, and limitation periods. Popular jurisdictions for DAPTs include Alaska, Delaware, Nevada, South Dakota, Wyoming, Tennessee, and others that have modernized trust laws.
Offshore trusts are historically used in jurisdictions like the Cook Islands, Nevis, Belize or other foreign trust havens. Offshore trusts can provide strong creditor barriers but carry reputational, tax, reporting, and practical enforcement risks. U.S. courts may still reach into offshore structures in certain circumstances, especially when fraudulent intent or close ties to the U.S. exist.
Which States Allow Domestic Asset Protection Trusts (DAPTs)?
A growing number of states have DAPT statutes. The exact list changes as laws evolve, but many recognized DAPT jurisdictions include Alaska, Connecticut, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. Each state’s statute differs on required local administration, statute-of-limitations for creditor claims, and exceptions. Always confirm the current list and rules with counsel.
What Assets are Suitable for an Asset Protection Trust?
Usually, the assets within an APT include non-retirement investment accounts, certain real estate, LLC or partnership interests, life insurance held in an irrevocable trust, and other non-ERISA assets.
Ideally, the settlor does not need access to the assets in the APT for their day-to-day needs. Planning should consider liquidity needs, tax consequences, and how beneficiaries will access funds. It is a good rule of thumb to consider assets placed in an APT as a rainy day fund.
Major Limitations and Risks
While asset protection trusts work for some UHNW families, there are some major limitations and risks to consider.
Fraudulent Transfer Risk
If a transfer to a trust is made to hinder, delay, or defraud creditors, or is too close in time to an anticipated claim, courts or bankruptcy trustees can unwind it. Many jurisdictions apply lookback periods (often measured in years), and federal bankruptcy law can create additional reachback exposure. Early planning is essential.
Charging Orders & Enforcement
For interests in closely held entities like LLCs or partnerships, a creditor’s remedy is often a charging order against distributions rather than outright seizure of trust assets. The precise protection varies by state and entity law, and charging-order protection is not absolute.
Exceptions for Certain Claims
Child support, alimony, some tax claims, or obligations arising from criminal conduct are commonly excluded from APT protection. State statutes differ on these carve-outs.
Cost, Complexity, and Governance
Maintaining multi-fiduciary structures, compliant trustees in protective jurisdictions, and careful documentation can be expensive. Poorly drafted or administered trusts may fail to deliver promised protections.
Reputational & Reporting Implications
Offshore options can invite additional scrutiny, complex reporting like FBAR or FATCA, and perceived reputational risk for families and family offices.
Typical Use Cases for UHNW Families & Family Offices
Asset protection trusts are utilized as pre-litigation protection where entrepreneurs, professional service providers, and real estate owners often plan early, before any creditor reality exists, to isolate business and personal risk. APTs may also be used for succession and legacy planning as APTs can hold illiquid business interests and pass economic value to future generations while protecting against creditor claims. APTs are often used in coordination with other structures like family limited partnerships (FLPs), LLCs, Dynasty Trusts, and robust insurance programs to create layered protection. Learn more about how trusts are taxed here.
FAQs
Q1: Can I move assets into an asset protection trust after being sued?
Generally, no. Transferring assets after a lawsuit is often reversible as a fraudulent conveyance. Effective asset protection requires planning well before any known claims.
Q2: Will a DAPT keep creditors away 100% of the time?
No.
Q3: Are offshore trusts better than domestic trusts?
Offshore trusts historically offered strong protection, but they bring higher compliance, reporting, and reputational costs. Many UHNW families now prefer well-drafted DAPTs in modern U.S. jurisdictions for easier administration and reduced regulatory friction.
Q4: How long before a creditor claim should I set up an APT?
There’s no one-size-fits-all answer. Lookback statutes and state rules vary. As a rule, earlier is safer: plan years, not weeks, before any foreseeable claim. Consult counsel to align timing with state-specific limitation periods.
Asset protection trusts can be a powerful component of a multi-layered wealth preservation plan for ultra-high-net-worth families, business owners, and family offices when used prudently and early. They work best as part of a broader strategy that includes entity structuring, insurance, careful governance, and professional administration. Given the legal complexity and the differences among jurisdictions, anyone considering an APT should consult specialized counsel and trusted wealth advisors to design a solution tailored to their goals and risk profile. Book a consultation with an advisor today.
Wealthspire Advisors LLC and certain of its affiliates are separately registered investment advisers. © 2025 Wealthspire
This material should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The information provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use.
