Domestic Asset Protection Trusts are self-settled trusts that are available in some states. Prior to these new trust laws, foreign asset protection trusts were a more common planning tool, however domestic asset protection is gaining popularity thanks to new statutory provisions. Alaska was the first state to create these laws, followed by South Dakota, Delaware, Nevada and a few others. A Domestic Asset Protection Trust typically has asset protection qualities and the following characteristics:
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What is a Domestic Asset Protection Trust? First, it is also known as a United States Asset Protection Trusts and fall under special laws in these jurisdictions that allow a trust settlor to be a trust beneficiary with significant protection of the trust assets from the settlor’s creditors, i.e. a “self-settled” trust. Without the asset protection trust laws, or a similar trust established in another state without DAPT laws, the settlor’s assets are accessible to creditors to the extent of the trust assets distributed to the settlor of the trust.
All participating DAPT states have their own statute of limitations on assets transferred therein. The Nevada trust offers the shortest limits. The statute of limitations sets the time when the trust assets are protected from the settlor’s creditors and will vary depending on each state’s method of defining creditors into classes. Each state recognizes preexisting and exception creditors, as well as a few other classes of creditors. Exception creditors can access DAPT assets through these statutes. Examples of these are ex-spouses and alimony claims, and some states define child support as an exception creditor. Each state defines exception creditors differently and it will depend on the state’s classification and public policy.
The principle benefit of DAPTs is to shelter an individual’s assets from future creditor claims. Although only select states have enacted asset protection trust statutes, non DAPT state residents can take advantage of the protective legislation under new rules. Though their effectiveness for California and New York residents are less than stellar when compared to offshore options. When establishing a domestic asset protection trust the settlor can designate the state law that governs the DAPT, even if the settlor’s home state has no such legal statutes. Non DAPT state residents would take steps to ensure the chosen governing law is respected by meeting formalities and requirements of the governing jurisdiction.
Using a DAPT as one tool in a comprehensive personal asset protection plan spreads your assets out over multiple fronts making you a tough litigation or judgment target. The costs of pursing your assets in multiple jurisdictions is a strong deterrent of frivolous lawsuits and litigious predators.
Just by choosing to protect your assets using a domestic trust is a great first step, even if nothing else is done. However, we specialize in robust protection and planning to make a strong tool, even stronger.
We use what are called charging order protected entities in concert with DAPTs. A charging order protected entity is an LLC (limited liability company) or LP (limited partnership). This means that a judgment creditor holds a lien against a member’s LLC or LP interest. This adds an additional level of protection of assets in the event the DAPT is disregarded for any reason.
An even stronger trust is called the Trigger Trust TM. A trigger trust is initial a domestic asset protection trust. Then when the legal storms arise that may threaten trust assets, your trustee can enact the offshore trust trigger. This puts the assets outside of the jurisdiction of the local court.