How to Set Up a Trust for Asset Protection

A trust isn’t just a financial tool for the ultra-wealthy—it’s a powerful strategy for anyone looking to safeguard assets, reduce estate taxes, and ensure their hard-earned wealth is preserved for future generations. Yet, many people shy away from the idea, either unsure of how to create a trust or doubting its true effectiveness.

Here’s the truth: Setting up a trust doesn’t have to be daunting. Its benefits extend to almost anyone with assets to protect, regardless of how “wealthy” they perceive themselves to be.

In this article, we’ll break down how to set up a trust, demystify the process behind how trusts operate, explore the different types available, and show you how to harness the power of trusts to secure your financial future. Whether you’re new to the concept or looking to refine your estate planning strategy, you’ll find everything you need to get started.

What Is a Trust?

A trust is a contract between a grantor (also known as a settlor) and a trustee. During the set-up of a trust, the grantor surrenders a select number of their assets to the trustee, who will manage them for the benefit of a third party – the beneficiary. 

Contrary to popular belief, trusts are not just for the wealthy. People working in industries with a high lawsuit risk, such as law, construction, and healthcare, often use them. It’s not just for the high rollers looking to secure valuable assets from predatory claimants. If you have a business or work in a profession with a high litigation risk, you have assets to protect.

Key Terms Used in Trust Setup

Some of the important terms associated with setting up a trust are:

  • Grantor/Settlor – The creator of the trust. This person forms the trust alongside a professional and funds the trust with their assets. 
  • Trustee – A person or company that manages the trust and legally owns the assets held inside the trust.
  • Beneficiary – The person, entity, or group of people who have some claim to the assets held in the trust.
  • Decedent – A person who has died. This term is typically used in reference to the grantor.
  • Property – Any assets, items, funds, real estate, or other possessions that are deposited into the trust (professionals also call this the trust “corpus”). 

Why You Should Create a Trust

People set up trusts for various reasons, including:

  • Asset protection: A properly establishedtrust can be an excellent way to defend assets against creditors and legal action. When you create a trust, you essentially give your assets to the trust, and they become the trustee’s and beneficiary’s property. Because you no longer own the assets within the trust, it is much harder for creditors and lawyers to access those assets. So, when properly drafted, you still have access but your enemies-at-law do not. 
  • Estate planning: Certain trusts are not subject to the same tax burdens as typical estate gifts. When you pass away and leave a trust behind, the beneficiaries can often receive more money than they would have if you left the assets in your will. 
  • Avoiding probate: Probate happens when a decedent leaves assets to be distributed and the court reviews the will for authenticity. Probate can be costly, as lawyers must review all relevant documents. Placing assets in a trust can help beneficiaries avoid these legal fees. Additionally, trusts allow grantors to add specific conditions regarding how assets are distributed and used.
  • Providing financial support to others: You can set up a trust to provide regular (e.g., monthly, quarterly, etc.) payments for certain purposes – to cover college expenses, for example. This sort of trust also guarantees that your beneficiary will receive the support they need, even in the event of your death.
  • Gaining privacy benefits: Many trusts, especially offshore trusts, can conceal assets from creditors and litigants. This makes it far more difficult for them to claim that transfers are fraudulent.
  • Minimizing taxes: Trusts are not subject to the same taxes as income and investment accounts. Leaving investment accounts and other wealth-generating assets in a trust can lower your overall tax burden.
  • Retaining Medicaid benefits: If your net worth or income is too high, it can prevent you from receiving Medicaid benefits. This can be particularly troublesome for grantors who require costly end-of-life care, which can drain the accounts they plan to leave for family members. Establishing a trust separates you from your assets and can make you eligible for Medicaid benefits. 

How Setting Up a Trust Works

The exact process of setting up a trust varies based on location, trust type, and trust goals. However, you will always have to go through these five steps when creating a trust:

  1. Select your trust type
  2. Choose a trustee 
  3. List all the assets you plan to deposit into the trust
  4. Hire an attorney to create the trust document
  5. Bring the completed trust agreement to the bank that houses the trust

Choosing the right trust for your needs and setting it up can get complex. It’s important to hire a legal professional to help you navigate the legalese surrounding trust laws and provisions  

The Cost of Setting Up a Trust

The bulk of your trust setup costs will go towards hiring a trust creation professional. This expense is well worth the cost. An experienced professional can quickly prepare all the legal documents for your trust – which would take weeks or even months for someone without trust creation experience. 

The cost to create a living trust varies depending on the experience of the one who drafts the trust. In addition, if your trust formation process is especially complex or simple, this can affect the setup fees.

How to Maintain Your Trust

To keep your trust compliant and effective, it’s essential to fund it properly and fulfill all legal tax obligations. Depending on the type of trust, taxation can vary. Some trusts are considered taxable entities, meaning any undistributed funds within the trust are subject to taxes. Others transfer the tax burden to the settlor or beneficiaries.

To navigate these complexities, always consult a qualified tax advisor. They can help you understand the specific tax implications of your trust and ensure that you remain fully compliant while maximizing its benefits.

You are typically not required to continually make deposits into your trust after creating it, but doing so is often a good idea. Any income that is not placed into trust can’t be protected by it during a lawsuit. Work with a financial advisor to determine your regular trust contribution. 

When you consider tax implications for your trust, note that irrevocable and revocable trusts are taxed differently. When revocable trusts grow in value, that income is taxed to the grantor since the trust is still one of their owned assets. Similarly, offshore irrevocable trusts pass the tax responsibility along to the grantor as well. 

Domestic irrevocable trusts, however, have their own tax ID numbers and are taxed separately from the grantor. When the grantor files their own tax return, the irrevocable trust does not count against what they owe the IRS. Instead, these trusts receive a deduction, and the taxes fall to the trust’s beneficiary. This often works out well, as beneficiaries commonly fall into lower tax brackets than grantors. 

Common Types of Trusts

Although there are many different trust specialties, let’s discuss four key types of trust funds: living, testamentary, irrevocable, and revocable. 

Living Trusts

A living trust is effective immediately after creation. People create this type of trust for estate planning purposes. That is, the living trust typically conveys their estate to designated heirs upon their passing. Thus, it avoids the expensive and time-consuming probate process. 

Testamentary Trusts

A testamentary trust is typically established through your will and doesn’t become effective until after your death. The person who created it is called the “testator.” People typically use this trust for estate planning purposes. A testamentary trust does not protect your assets while you are alive because it isn’t active until after you’ve passed.  

Irrevocable Trusts

Irrevocable trusts give ownership and control of all trust assets to a trustee. Once established, these trusts cannot be easily changed by the grantor. People often use this trust type as a method of asset protection since it separates the assets from the grantor, making said assets very difficult for creditors to access. 

Revocable Trusts

Revocable trusts give grantors the ability to retain their control over the assets within the trust. They also allow for changes to the trust itself. The terms, trustees, and beneficiaries can all be altered over the life of the trust. Because the grantor maintains such power over the trust, revocable trusts are not effective for asset protection.

Notable Trust Subtypes

In addition to those four main categories are kiss trusts, revocable living trusts, land trusts, title-holding trusts, and irrevocable Medicaid protection trusts. Though these trusts fall within the main categories, their unique purposes are worth understanding:

Revocable Living Trusts

A revocable living trust is a popular trust for estate planning. These trusts have more before- and after-death advantages when compared to testamentary trusts and wills, which are other popular estate planning tools.

The most notable benefit of a revocable living trust is that it eliminates the need to go through probate courts. When a decedent passes their wealth onto another person through a will, a probate court will divvy up the assets and usually charge a hefty fee to do so. A revocable living trust prevents this by serving as a substitute for power of attorney. Essentially, the assets must be divided exactly as the trust specifies. 

And because these trusts are revocable, they can be changed at will by the grantor. This enables you to make adjustments based on shifting relationships with family members and other potential beneficiaries. This solves many of the common issues with inheritances. However, you should know that if you cut out or exclude someone from the living trust as a beneficiary, they can still challenge the trust.

Kiss Trust

Kiss trusts are a popular option for anyone who wants to use the estate planning benefits of trusts but lacks the wealth typically associated with a grantor. These trusts don’t cost nearly as much to set up as other trusts.

These living irrevocable trusts can be started with a minimum investment of $1,000 or as little as $50 a month. In addition to that initial funding cost, there is a cost for general setup expenses. Once funded, these trusts can grow exponentially in value, provided you make regular contributions. 

This type of trust is usually set up to allow the recipient (typically a child or grandchild) to withdraw money based on certain criteria. For example, if you listed a grandchild as a beneficiary, you could stipulate that the trust money is only to be used for higher education, home buying, and wedding expenses. When your grandchild reaches the appropriate age to begin meeting these milestones, they can use the trust funds rather than drain their own accounts. 

Kiss trusts also have tax benefits for both the settlor and the beneficiary. Once money is deposited into the trust, it belongs to neither party. This ensures that the funds inside the trust won’t prevent the beneficiary from qualifying for things like needs-based financial aid.

Land Trusts

A land trust holds real estate. Commercial properties, undeveloped land, and even private residences can be placed within a land trust. Their primary benefit is confidentiality; they allow you to privately hold real property without listing yourself as the landowner. This benefit is particularly valuable for those looking to avoid lawsuits, as attorneys can scroll through public records and file lawsuits against landowners for countless reasons. 

Title Holding Trusts

Title-holding trusts are used to hold property titles. Typically, these titles include personal property such as boats, automobiles, and other expensive titled assets. Like land trusts, you can use a title-holding trust to keep your ownership of certain assets private. 

Irrevocable Medicaid Protection Trust

The cost of long-term care is far higher than many of us would like. For those who want to pass assets down to loved ones but need long-term care, things can get quite difficult. If your net worth is too high, you won’t qualify for Medicaid benefits, which would otherwise pay for long-term care. 

Many people who find themselves in this situation choose to set up a Medicaid asset protection trust. This trust, like other irrevocable trusts, separates your assets from your ownership and can significantly lower your net worth. If set up properly, you can use these trusts to leave money behind for friends and loved ones while retaining access to Medicaid benefits. 

If you’re considering setting up this sort of trust, it’s a good idea to do it sooner rather than later. Medicaid has a five-year look-back period, meaning they can consider any assets deposited within the past five years when determining your benefit eligibility.

Domestic or Offshore?

When you create a trust, you can establish it domestically or offshore. Both options have respectable benefits regarding asset protection. However, you should understand both the advantages and disadvantages of each before you set up your trust:

Domestic Trusts

The first state that allowed the establishment of asset protection trusts was Alaska in 1997. Delaware and Rhode Island quickly followed suit in 1997 and 1999, respectively. To date, there are only 17 states that have asset protection legislation. The regulations vary greatly from one state to another. So, if you’re considering setting up a domestic asset protection trust, choose a state with the most beneficial laws.

A major drawback of a domestic asset protection trust is that it’s under the body of laws of the US government. Though powerful on many levels, these laws tend to be creditor-friendly. You might think your assets are safe and secure under friendly Delaware legislation. But they can be placed in jeopardy if a lawsuit is mounted against you in another state. It’s not always easy to predict which side will ultimately win in a battle between two equal but separate jurisdictions. And there you are, caught in the middle, trying to hold onto your assets any way you can.

You can shop around since you’re not required to live or work in the state where you decide to set up your trust. Of course, what’s ‘beneficial’ for you may not be the case for another person. An asset protection trust must be customized to meet your needs and goals. Any asset planner who says otherwise is giving you bad advice. 

Offshore Asset Protection Trust

An offshore asset protection trust puts your assets squarely under the guardianship of a sovereign country. These jurisdictions often have settlor-friendly laws to attract offshore investors and trust settlors. The primary benefit of an offshore trust is that they do not have to follow US court judgments. Many will require a new trial under their laws, even for creditors who have already won in a US court. A new trial on foreign soil can be costly, time-consuming, and tedious. A predatory plaintiff will often look for an easier mark rather than go through the trouble and expense of another trial. 

Set Up an Effective Trust with Help from Asset Protection Planners

Setting up a trust can help you meet many major financial goals. It’s an excellent asset protection vehicle, especially when you set one up offshore. However, if the thought of having your assets thousands of miles away makes you uncomfortable, a domestic asset protection trust can offer ample protection under certain circumstances.

One popular alternative is our trademarked Trigger Trust ®. This is a domestic trust for when waters are calm. When the legal seas become stormy, the trustee can trigger the armor plating of an offshore trust. 

No matter which type of trust you choose to create, the key to harnessing the legal power of a trust is to set one up as early as possible. By doing so, you can preemptively protect your assets against a lawsuit before one happens. Plus, you’ll have estate plans ready in the event of your passing.

If you’re planning to set up a trust soon, we’re ready to help. The trust establishment experts at Asset Protection Planners have been setting up domestic and offshore trusts for decades. We’ll help you create a trust that provides you and your loved ones with the security and benefits you need. 

Contact us to start setting up your trust today!