Domestic Asset Protection Trusts
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:
- Must be an irrevocable spendthrift trust
- Have at least one resident trustee in the state established
- Some or most of the trust administration must be conducted in the state established
- The trust settlor cannot act as trustee
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What is a DAPT?
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.
Domestic Asset Protection Trust Laws
All participating DAPT states have their own statute of limitations on assets transferred therein. The Nevada trust is one of the best and 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.
DAPT Setup Tips
- Select the jurisdiction that is right for you. Deciding where to establish your trust is a critical first step that should be done after speaking with a qualified asset protection planner.
- Establish an irrevocable trust
- Select an experienced independent trustee in your chosen DAPT state who is a resident of that state with solid references and business contacts
- Transfer assets and/or make deposits in your DAPT state rather than the state which the settlor resides
- Only hold real property in your DAPT located in the DAPT state
- Make compliant transfers to your trust based on the laws of the settlor’s residence and the state that your trust is established
- Make sure your trustee has absolute discretion over trust distributions to the settlor
- Ensure the settlor holds no interest in trust assets
- Check your state laws on property transfer in divorce, especially if the trust was established while still married
- Determine taxation requirements of the DAPT state for non resident trust settlors
- Understand that most states will not protect settlor’s assets from child support claims
Other Benefits of using a DAPT
- A DAPT established and properly settled before a settlor marries can place assets out of reach of a divorce claim under these protective statutes in several of these states.
- Divorce planning is not something that is well-discussed in the lives of a newly engaged couple, however future financial estate planning is a more palatable subject.
- DAPTs can be used in lieu of a prenuptial agreement with significantly stronger results.
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.
Strengthening Your Plan
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.