A domestic asset protection trust (DAPT), also called a self-settled trust, is a type of trust which allows an individual to protect assets from personal creditors while still maintaining control over and benefiting from the assets. Not every state allows for the formation of DAPTs so you have to establish this type of trust in a state that allows them. As of June 2021, just 16 states have enacted laws that legalize this type of trust, including Ohio, Nevada, Missouri, South Dakota, and Wyoming.
Establishing a trust provides important protections for you during your lifetime, and your family after you are gone. We can assist with drafting irrevocable, dynasty, spendthrift and other trusts.
Your goal may be asset protection, privacy, tax minimization, charity, all or none of the above. In either case, a trust is likely the most efficient way to achieve your goals.
What Are the Attributes of a Domestic Asset Protection Trust?
DAPTs must be irrevocable, which means the terms of the trust cannot generally be amended, modified, or terminated. However, most DAPTs will contain provisions which allow them to be amended, modified, or terminated if specific conditions are met. Under Wyoming law, the person who sets up the trust and contributes assets to it can also be the beneficiary of the trust. This feature is why DAPTs are also called self-settled trust. You can use a DAPT to hold and protect many assets, including cash, securities, real estate, and business ownership.
- Irrevocable
- Grantor is also the beneficiary
- Controlled by a trustee
- Trustee cannot be the grantor or beneficiary, but a Private Trust Company owned and controlled by the grantor or beneficiary.
What is the Waiting Period?
Although setting up a DAPT protects your assets from personal creditors and lawsuits, you will not get complete protection for your assets immediately. Each state that permits the establishment of a DAPT allows creditors to pursue assets in the DAPT for a period of time after they are contributed. The period which must pass before you obtain full asset protection with a DAPT can run from several years in some states, to just six months or less in Wyoming. Consequently, it is vital to understand how each state handles the statute of limitations for asset protection.
What are the Benefits of a DAPT?
Creating a DAPT protects your assets from creditors once a state-mandated statute of limitations expires. Since a creditor does not have access to DAPT assets to satisfy your personal debts, the creditor is much more likely to negotiate a settlement that might allow you to pay off your debt for just a few pennies on the dollar.
Setting up a DAPT can also protect your nonmarital assets if you place the assets in the trust before you get married. If you face a divorce, your spouse cannot ask for nonmarital assets because they are protected in the DAPT. Establishing a DAPT before marriage is a much easier way to protect your assets than negotiating to a prenup.
Domestic Asset Protection Trusts
Domestics trusts are those which are formed inside the USA rather than traditional offshore havens such as Nevis, Cook Islands, Bahamas, Isle of Man, etc. US domiciled trusts are generally seen more favorably by the IRS and similar benefits without needing to trust an overseas trustee.
What are the disadvantages of a DAPT
The primary downside of a DAPT is the additional complexity. While this is off putting to some clients, those of more substantial means may manage the process with trusted advisors. Remember, the more barriers and complexity you put between your creditors and assets, the more likely you are to obtain favorable terms in the event of a lawsuit.
Are You a Good Candidate for a DAPT?
A DAPT is not for everyone, but is a good fit for a wealthy individual who faces substantial personal liability and risk. It is a popular way for those that work in high-risk professions to protect personal assets. To determine whether you should set up a Domestic Asset Protection Trust, contact us today.
Types of Trusts
Trust law rewards creativity. We like to say there are as many types of trusts as there are people and their situations. Regardless of your situation, there is likely a trust which can help you achieve your desired outcome.
Irrevocable Trusts
Revocable trusts are used to bypass probate, but have no asset protection or tax benefits. High Net-Worth Individuals are recommended to consider an irrevocable trust. It introduces additional complexity which are generally offset by tax savings and asset protection. The above mentioned DAPTs are one example of an irrevocable trust.
Family Trusts
Revocable trusts are used to bypass probate, but have no asset protection or tax benefits. High Net-Worth Individuals are recommended to consider an irrevocable trust. It introduces additional complexity which are generally offset by tax savings and asset protection. The above mentioned DAPTs are one example of an irrevocable trust.
Asset Protection Strategies
We advise a layered approach consisting of insurance, LLCs, trusts, retirement plans, and more to place as many barriers as possible between potential creditors and assets.
Trust Law
As stated on the main blog page, most practitioners stick to abstract discussion. This abstraction prevents readers from understanding whether a trust would have any practical value, e.g. can a trust own an LLC or what's the difference between a family trust and LLC.
While you should always speak to an attorney regarding whether a trust is or is not a fit, we believe in empowering our clients. For this reason, we have provided articles which address common trust law questions, e.g. does a trust need an EIN, how do you modify an irrevocable trust, what happens if a grantor dies?
These lay the groundwork for future discussions, but in no way obviate the need for an experienced trust attorney. Find additional practical applications of trust law below.
