Asset Protection Trusts are designed to protect a nest-egg from lawsuits, judgement creditors, divorces, or other financial calamities. They are great for persons in high-risk professions.
Almost all trusts have some asset protection provisions, so one could say that there are many different types of asset protection trusts. This page refers to self-settled spendthrift trusts.
Spendthrift provisions, common to most trusts, state that the assets of the trust are not subject to the creditors of the trust's beneficiaries. However, most jurisdictions have ruled that these spendthrift provisions do not apply to the person who created the trust (called the Grantor). This prohibition on self-settled spendthrift trusts is a matter of public policy for the jurisdictions in which it applies.
Fortunately, in recent history several jurisdictions have changed course and now allow self-settled spendthrift trusts. Certain American states, such as Delaware and New Hampshire, allow Domestic Asset Protection Trusts (DAPTs). Also, several jurisdictions allow Offshore Asset Protection Trusts, such as the Cayman Islands and Cook Islands. In order for this protection to work, certain jurisdictional level requirements must be met.
Because of the sensitive nature of self-settled asset protection trusts, it is wise to use them to protect a nest-egg, and not try to shelter 100% of your assets. And it is paramount to transfer your nest-egg to the asset protection trust before you incur serious liability. If you are already facing a potential liability, and subsequently transfer asset to an asset protection trust, then you may have violated a fraudulent transfer law, which would result in the unravelling of your asset protection, or your being found in contempt of court. Still, if handled properly, an asset protection trust can be a valuable part of your estate plan.