Protecting your assets against lawsuits and creditors is among the best moves you can make to keep the courts from taking what’s yours. One of the many ways people gain the protection they’re looking for is by using domestic asset protection trusts, or DAPTs.
But how exactly do DAPTs work? Asset Protection Planners has the answers. Our firm has been setting up domestic and offshore asset protection trusts for decades. In that time, we’ve learned the most important things you need to know about DAPTs, and we’ve put it all in this comprehensive guide.
Read on to learn more about domestic asset protection trusts and see if they are a good financial security solution for you:
- What is a Domestic Asset Protection Trust?
- States that Allow Domestic Asset Protection Trusts
- Who Needs a DAPT?
- Domestic Asset Protection Trust Benefits
- DAPT Disadvantages
- When to Set Up a Domestic Asset Protection Trust
- Domestic Asset Protection Trust Setup Tips
- Strengthen Your Domestic Asset Protection Trust with Professional Help
- Domestic vs. Offshore: Which Asset Protection Trust is Better?
What is a Domestic Asset Protection Trust?
A domestic asset protection trust (also known as a United States Asset Protection Trust) is a type of irrevocable trust available in certain states. It is often used for estate planning and protecting assets from creditors and legal threats.
DAPTs are unique in that they’re self-settled trusts. This means the settlor (the person creating the trust) can list themselves as a beneficiary and receive distributions from the trust without impacting its asset protection capabilities. However, while the settlor can be a beneficiary, they are not allowed to be a trustee.
Unlike offshore asset protection trusts, a DAPT can be operated by a trustee in the same jurisdiction as the settlor, provided they place the trust in their home state. This can give the grantor more peace of mind, as they can appoint a trustee who is familiar to them and lives nearby. However, it’s worth noting that the trustee must be a resident of the state where the trust is created, and some or all of the trust administration activities must occur there.
Domestic asset protection trusts were created as a marketing tool to dissuade people from using foreign asset protection trusts. States were concerned about the number of assets leaving their jurisdiction and felt compelled to create an alternative for their citizens. Before Alaska created its DAPT laws in 1997, most people used offshore trusts to protect their assets.
Today, 17 states offer DAPTs, including Alaska, South Dakota, Delaware, Wyoming, and Nevada. This type of trust has steadily gained popularity since it was introduced thanks to its ease of setup, proximity to US-based settlors, and ease of use in estate planning.
States that Allow Domestic Asset Protection Trusts
States began offering domestic asset protection trusts in 1997, when Alaska and Delaware introduced their DAPT provisions. As of this writing, DAPTs are only available in the following 17 states:
- Alaska
- Delaware
- Hawaii
- Michigan
- Mississippi
- Missouri
- Nevada
- New Hampshire
- Ohio
- Oklahoma
- Rhode Island
- South Dakota
- Tennessee
- Utah
- Virginia
- West Virginia
- Wyoming
It’s better to establish a DAPT in the state where you live, if possible. Doing so will help you avoid situations where the Full Faith and Credit Clause of the United States Constitution comes into play. This clause requires each state to recognize other states’ judgments without going through a retrial. When you live in a state with unfavorable trust laws, your DAPT’s security could be in jeopardy, even if the DAPT was founded in a very trust-friendly state.
When you choose a state to establish your trust, know that not all state DAPT laws are created equal. The protections offered by DAPTs vary from state to state. Of all the states that offer irrevocable asset protection trust statutes, Nevada and South Dakota are renowned for having the best trust laws.
Nevada and South Dakota offer the shortest waiting period (6 months if the trust is publicly declared) before your assets are protected. In addition, Nevada is the only state that doesn’t recognize exception creditors who can breach the trust’s protections. These two benefits allow you to set up the trust quickly, deposit your assets into it, and protect those assets against almost any type of creditor, even an ex-spouse looking for alimony.
Learn more about the best state for an asset protection trust.
Who Needs a DAPT?
A domestic asset protection trust is best suited for those who work in professions with a high lawsuit risk, such as doctors and lawyers. These trusts are also a good fit for high-net-worth individuals and those with public personas, such as celebrities and CEOs.
In layman’s terms, a domestic asset protection trust provides these individuals with an effective way to shelter their wealth against legal action without forcing them to place their belongings in the hands of a trustee in another country. That said, with a reliable trustee, the proven track record and robust legal precedent of an offshore trust remain unmatched for asset protection.
A DAPT is also useful for anyone concerned about the burden of estate taxes. Trusts are not subject to the same death taxes as liquid and physical assets. As a result, many people place their assets in a trust to ensure that the inheritance they leave behind retains its maximum possible value.
Domestic Asset Protection Trust Information Available – FREE Consultations, contact us today
Domestic Asset Protection Trust Benefits
Domestic asset protection trusts provide several benefits, including increased asset security and personal convenience. It’s worth noting that some of these benefits are only possible when the trust is set up by an experienced professional group, like Asset Protection Planners.
Below are the primary advantages of DAPTs.
Availability to Non-Residents
When creating a domestic asset protection trust, the settlor is not required to establish it in their home state. They can form the trust in any state that offers a DAPT, so long as their trustee lives in the state where the trust is formed. This is particularly useful for settlors living in states that do not offer DAPTs or who need more comprehensive asset protection than their home state’s DAPT laws provide.
Creditor Claim Protection
Sheltering an individual’s assets from creditor claims is the principal benefit of domestic asset protection trusts. Once anything is put in a trust, several legal barriers are formed between a creditor and those assets. In many cases, merely placing assets in a DAPT will discourage frivolous lawsuits.
Divorce Protections
It is best to place money and personal items into a trust before marriage to protect them during a divorce. Setting up a trust provides many of the same benefits offered by prenuptial agreements. Plus, it doesn’t require the same detailed breakdown of how each asset will be divided if the couple separates. Moreover, you can establish a trust on your own, avoiding the potential relationship strain that often comes with a prenup. Additionally, because trusts are also used for estate planning, discussions around placing assets into a trust are often less emotionally fraught than those surrounding a prenup.
Greater Cost Barrier for Lawsuits
Litigation is costly, and the complexities introduced by a trust make court cases longer and more expensive for the plaintiff. Even creditors pursuing debt payments will often settle out of court for a much lower amount than the debt owed due to the high cost of court action.
No Holding or Transfer Limits
Just about any asset you own can be placed within a domestic asset protection trust. Virtually anything, including liquid currency, real estate, stock holdings, investment accounts, and even personal possessions, can go into a DAPT. Also, because the settlor can appoint themself as a beneficiary of the trust, these assets will remain partially accessible to them.
Short Statute of Limitations
In the world of trusts, a statute of limitations is a limit on how long a creditor has to file a lawsuit against a trust. In most states, the DAPT statute of limitations is four years after a transfer occurs, though some states have two-year, 18-month, and even six-month statutes of limitations.
All of these benefits have made domestic asset protection trusts a popular choice for residents of the United States who need to guard their wealth against creditors and legal threats. For it to actually survive the rigor of a courtroom challenge, one must have a properly drafted asset protection trust. Thus, many of these benefits are only made possible with the help of an asset protection professional. Without a professional team at your side, you could be at risk of forming a trust in a way that leaves your assets vulnerable.
DAPT Disadvantages
While domestic asset protection trusts have many benefits, they are not foolproof. Certain elements of DAPTs can leave your assets unprotected against certain legal actions and various creditors.
Below are some drawbacks you should know about before creating a DAPT.
Efficacy Varies Based on Home State
Though residents of any state can form a DAPT in another state, these trusts don’t always work effectively for people who live in states that do not offer them. For example, residents of California or New York who establish a DAPT in Nevada can have their assets pursued via a court order from their home state. An offshore trust may be a better option if you live in a state that does not offer domestic asset protection trusts (or even if you do). Simply put, case law history shows that offshore trusts are simply more effective at protecting assets than domestic ones.
Lack of Bankruptcy Protections
If the settlor files for or is forced into bankruptcy by their creditors, their trust can only protect assets that have been a part of the trust for at least 10 years. This long wait period makes DAPTs a poor option for those facing imminent bankruptcy.
Minimal Privacy
Unlike offshore trusts, which have strict confidentiality provisions, DAPTs offer little to no privacy. Trust assets can be revealed by subpoenas and discovery orders, making it easier for creditors to go after them. After all, the trust and the trustee of a domestic trust are under the jurisdiction of US courts.
Susceptible to Court Orders
Thus, the primary drawback of domestic asset protection trusts is their susceptibility to court orders. Judges in the United States, particularly at the federal level, can order trust assets to be confiscated regardless of what state statutes say. If your trustee attempts to refuse the order, they can be found in contempt of court. This is a huge disadvantage when compared to offshore trusts, which are not subject to court orders from the United States.
Trustee Location Requirements
To form a domestic asset protection trust, the settlor needs to select a trustee who lives in the state where the DAPT is being formed. This requirement limits their choices when picking a trustee. More importantly, it can put them in the uncomfortable position of having a stranger legally own and manage a significant portion of their assets.
Ultimately, if you are looking for a trust that is virtually guaranteed to protect your assets against pressing legal threats and creditors, a domestic asset protection trust has some shortcomings, especially when compared to an offshore trust. However, DAPTs are still valuable tools that provide some protection and are excellent for estate planning. When deciding if one is right for you, weigh the disadvantages and advantages in relation to your unique situation.
When to Set Up a Domestic Asset Protection Trust
Domestic asset protection trusts are most effective when they’re set up before the court renders a creditor judgment. Once a DAPT is set up, the assets within are not fully protected until the statute of limitations on an asset transfer expires. In many cases, the statute of limitations is multiple years. If someone sets up a DAPT just months before a lawsuit, their trust likely won’t provide the asset protection they need.
Establishing a trust well before legal troubles arise can also prevent the trust from being seen as fraudulent. If someone’s lawsuit and DAPT administration happen to coincide, the court could rule it a fraudulent transfer. The good news is that fraudulent transfer standards are quite conservative. Most jurisdictions require a high burden of proof before they deem a trust invalid. Still, it’s always best to form a trust well ahead of time to avoid this situation entirely.
Once the statute of limitations ends and the trust assets can be protected from creditors, there are still some risks to keep in mind. Each state recognizes pre-existing and exception creditors, with the lone exception of Nevada, which does not recognize the latter. Exception creditors can access trust-held assets that most creditors cannot. Common examples of exception creditors include alimony and child support claims brought about by ex-spouses. Each state defines exception creditors differently, and the definition will depend on the state’s classification and public policy.
In short, the best time to set up a DAPT is well before it is needed. Making one early on ensures that it will be able to protect any assets whenever threats arise.
Domestic Asset Protection Trust Setup Tips
The way that your trust is set up will have a significant impact on how well it protects your assets. To ensure that you receive the maximum protection possible, follow these tips:
- Speak with a qualified asset protection planner to get help selecting the right jurisdiction for you.
- Establish a properly drafted irrevocable trust.
- Select an experienced independent trustee who lives in your chosen DAPT state and has solid references and business contacts.
- Transfer assets and/or make deposits in your DAPT state rather than the state where you live, provided your trust is not in your home state.
- Only place real property into your trust if the property is physically located within the state where the DAPT was created.
- Make compliant transfers to your trust based on the laws of your home state and the state where your trust is formed.
- Make sure your trustee has absolute discretion over trust distributions to the settlor.
- Ensure the settlor holds no direct interest in trust assets.
- Check your state laws on property transfer in divorce, especially if the trust was established while you were still married.
- Determine the DAPT state’s taxation requirements for non-resident trust settlors and adhere to all tax regulations.
By following these tips, you can rest assured that your domestic asset protection trust will provide the maximum possible defense against any threats to your wealth. Continually review any updates to DAPT laws within the state where your trust was formed to ensure that you’re keeping the trust compliant. If you choose to work with a professional group, they can manage a portion of trust maintenance for you.
Strengthen Your Domestic Asset Protection Trust with Professional Help
Setting up a domestic trust to protect your assets is an impressive first step in building your financial security. However, working with a professional can help you create a trust with even more robust protections.
One way a professional can improve a DAPT’s efficacy is by charging order protected entities. A charging order protected entity is an LLC (limited liability company) or LP (limited partnership). If a creditor attempts to claim your assets, they’ll find that the LLC or LP owns them. This adds another layer of protection to your assets if the DAPT is disregarded for any reason.
An even stronger domestic trust that professionals can help set up is a Trigger Trust TM. A trigger trust is initially established as a domestic asset protection trust. However, when legal troubles arise that may threaten trust assets, your trustee can enact the offshore trust “trigger.” This action transfers the assets to an offshore trust outside the local court’s jurisdiction.
Domestic vs. Offshore: Which Asset Protection Trust is Better?
While Domestic Asset Protection Trusts (DAPTs) offer a significant step forward in asset protection within the United States, offshore trusts remain a superior option for those seeking maximum protection from lawsuits, divorce, and judgments. These trusts are governed by foreign laws that often provide far more robust protections for trust assets.
Offshore jurisdictions typically have a strong legal framework designed to shield assets from creditors and other claimants. These jurisdictions often have strict privacy laws that make it difficult for creditors to even locate trust assets. Additionally, many offshore jurisdictions offer strong protections against fraudulent transfers, meaning that creditors may have a harder time challenging the trust’s validity.
Most importantly, offshore jurisdictions do not have to adhere to court rulings that happen outside of their court system. Even if a judgment is obtained in a domestic court, it may be virtually unenforceable against offshore trust assets.
To give you a clearer view of how domestic asset protection trusts and offshore trusts stack up against one another, we’ve assembled the following comparison chart:
| Feature | Domestic Asset Protection Trust (DAPT) | Offshore Trust |
|---|---|---|
| Jurisdiction | Specific US states (e.g., Alaska, South Dakota, Nevada) | Foreign countries (e.g., Cook Islands, Nevis, Cayman Islands) |
| Asset Protection | Offers some protection from creditors, but limitations exist | Generally offers strongest asset protection, with fewer exceptions |
| Privacy | Limited privacy protections | Strong privacy laws, making it difficult to locate assets |
| Legal Framework | Varies by state, but generally less developed for asset protection | Typically has a robust legal framework designed for asset protection |
| Enforcement of Foreign Judgments | Can be enforced in certain circumstances | Often limited or non-existent |
| Cost | Generally less expensive to establish and maintain | Typically higher establishment and ongoing costs |
| Complexity | Relatively straightforward to establish | Can be more complex to set up and manage |
As you can see from the above chart, DAPTs don’t offer quite the same level of protection as offshore trusts. However, they’re cheaper and more convenient to set up. If you have few creditors and are unlikely to be sued, a DAPT might be right for you.
Learn more about offshore vs. domestic asset protection trusts.
Schedule a Free Consultation to See If a Domestic Asset Protection Trust is Right for You
Securing your assets against lawsuits, divorce, and creditors is more important than ever. Lawsuits are on the rise, and your chances of being sued increase with each passing year, especially if you work in a high-risk profession.
The right asset protection strategy can help protect your wealth and livelihood. Schedule a free consultation with Asset Protection Planners today to see if a domestic asset protection trust can provide the security you need.