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An asset trust, also called an asset protection trust, is a type of trust created to protect or shield assets for the benefit of the trust's beneficiaries. Like other trusts, it is a legal entity established for the control and management of a person's property or money. Asset protection trusts are meant to protect assets from undesirable events and situations, such as loss in lawsuits, liens created by creditors, divorce settlements, and irresponsible beneficiaries.
When a person, called the grantor, creates an asset trust in jurisdictions that have laws allowing them, he provides assets for the benefit of his beneficiaries without worrying that they’ll be lost to creditors or any other organization or individual. The assets placed in an asset trust are no longer owned by an individual person. The trust owns them and is immune to creditors and lawsuits against the beneficiaries or grantor.
An asset trust’s protective qualities don’t limit its benefits, however. A beneficiary can receive income from the trust and even use it to start a business. He could run the business and benefit from it financially without worrying about losing the trust’s assets in a business liability lawsuit. The trust’s assets and the beneficiary’s assets would be considered entirely separate.
Asset trusts contain a spendthrift clause, which gives a trustee authority over how the assets are used to benefit the trust's beneficiary. The inclusion of a spendthrift clause puts a beneficiary’s interest in the trust out of the reach of creditors. This only works, however, before the assets in the trust are distributed to the beneficiary. Once they are distributed to the beneficiary and out of the control of the trust, creditors can sue and attempt to attach the beneficiary's assets.
Sometimes asset protection trusts are also created to protect the trust’s assets from the beneficiary. For example, if a beneficiary has a gambling problem or spends money irresponsibly, this type of trust can benefit the beneficiary while still protecting the trust’s assets. Instead of giving the beneficiary control over how the assets are used, this trust places the responsibility for control of the assets in the hands of an independent trustee. This person then decides how money and assets in the trust would be used on the beneficiary’s behalf. For example, it may provide income the beneficiary can use for daily living requirements, but not give him access to very large sums of money.