As a trust set up and managed by a trustee, a domestic asset protection trust (DAPT) protects assets from a creditor that wins a judgment during a court hearing. You have to establish this type of trust in a state that allows the formation of a DAPT. As of June 2021, just 16 states have enacted laws that legalize this type of trust, including Ohio, Nevada, Missouri, South Dakota, and Wyoming.
What Are the Attributes of a Domestic Asset Protection Trust?
This type of trust is considered irrevocable, which means the terms of the trust cannot be amended, modified, or terminated without permission from the grantor’s beneficiary or beneficiaries. It is managed similarly to a spendthrift trust in that it allows you to set up a trust for yourself. This gives you the legal power to have complete control over your money. You can use a DAPT to transfer many different assets, including cash, securities, real estate, and business ownership.
A DAPT typically possesses the following attributes:
- Controlled by a trustee
- Must have at least one appointed trustee
- One person cannot fill the role of grantor and trustee, but a Private Trust Company may be used
What is the Waiting Period?
Although setting up a DAPT protects your assets from creditors and lawsuit settlements, you need to act with a sense of urgency to get complete protection for your assets. This is because once you establish a DAPT, your assets do not receive immediate protection. Each state that permits the establishment of a DAPT allows creditors to pursue assets until the statute of limitations runs out. The waiting period for asset protection with a DAPT can run several years in some states, or just six months in Wyoming. Consequently, it is vital to understand how each state handles the statute of limitations for asset protection.
A family law attorney can help you choose the right state to set up a (DAPT).
What are the Benefits of a DAPT?
Creating a DAPT protects your assets from creditors once a state-mandated statute of limitations expires. A DAPT also helps you avoid liquidating assets because of a lawsuit settlement. Since a creditor does not have access to your assets to resolve a debt, 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 non-marital assets if you place the assets in the trust before you get married. If you face a divorce, your spouse cannot ask for non-marital assets because they are protected in the DAPT. Establishing a DAPT before marriage is a much easier way to protect your assets than agreeing to a prenup.
What are the disadvantages of a DAPT
The primary downside to an irrevocable trust 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 desires to minimize their 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.