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An asset protection trust is a type of trust that is designed to protect a person's assets from claims of future creditors. These types of trusts are often set up in countries outside of the United States, although the assets do not always need to be transferred to the foreign jurisdiction. The purpose of an asset protection trust is to protect assets from creditors.
These trusts are typically restricted by being irrevocable for a number of years and not allowing the trustmaker to benefit from the trust. Typically, any undistributed assets of the trust are returned to the trustmaker upon termination of the trust. The asset protection trust is basically a trust containing a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor.
If a person could benefit from the trust being established, this could be a reason to challenge the asset protection trust. If the trust is created with knowledge of an impending claim, it is possible the trust could be challenged as a fraudulent conveyance. For example, creating a trust right before filing bankruptcy may throw up red flags for examination.
The elements of a fraudulent conveyance transfer are defined as follows by the Uniform Fraudulent Transfer Act:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that he [or she] would incur, debts beyond his [or her] ability to pay as they became due.
Before you qualify for the government nursing home assistance program, there is a 60 month look back to see if and when you transferred your assets for less than fair cash value or you transferred your assets into a trust system or any system of transferring your wealth for the purpose of becoming eligible for the nursing home program depriving the state of all your available resources for your long-term health care.
Transferring, giving away or selling resources for less than fair market value is called a "disposal of resources". Under the Deficit Reduction Act of 2005, the look back period (five years rather than three) will apply to transfers made on or after February 8, 2006. For every $4300 disposed of you will be disqualified for one month of Medical Assistance coverage of your nursing home care.
The penalty period for transfers made on or after February 8, 2006, starts on the later of: the first day of the month after which assets are transferred for less than fair market value, or the date on which you are eligible for Medical Assistance—Long Term Care. The change from 3 years to 5 will be phased in so that, for example, if you apply for Medical Assistance in March, 2009, the look-back period will be three years and one month. As of February, 2011, the full look-back period of five years will be fully in effect. If you give away property or money on more than one occasion, the second penalty does not begin to run until the end of the first one. The length of the disqualification depends on the value of the resources transferred.