A Domestic Asset Protection Trust (DAPT), also called a Self-Settled Trust, is a type of Trust that 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. Your goal may be asset protection, privacy, tax minimization, charity, or all or none of the above. In either case, a Trust is likely the most efficient way to achieve your goals.
DAPTs must be irrevocable, which means the terms of the Trust cannot generally be amended, modified, or terminated. However, most DAPTs will contain provisions that 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.
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.
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 a prenup.
Domestic Trusts are those that 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 have similar benefits without needing to trust an overseas trustee.
What is a Dynasty Trust?Spendthrift TrustAsset Protection TrustsDomestic Asset Protection TrustSelf-Settled TrustsThe 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.
A DAPT may not be suitable for everyone, but it is particularly well-suited for wealthy individuals confronted with significant personal liability and risk. It serves as a favored option for those engaged in high-risk professions aiming to safeguard their personal assets. To assess whether establishing a Domestic Asset Protection Trust is the right choice for you, it is advisable to consult with an experienced Trust attorney
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.
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 is generally offset by tax savings and asset protection. The above mentioned DAPTs are one example of an Irrevocable Trust.
How Does an Irrevocable Trust Work?Charitable Remainder TrustsWhat Happens to an Irrevocable Trust When the Grantor Dies?Can an Irrevocable Trust be Amended?Family Trusts are designed to protect and distribute a family's wealth during and after the creator's life. Key participants include the settlor, who establishes the trust and funds it; the trustee, responsible for managing and distributing assets; and beneficiaries.
Family Trust Pros & ConsFamily LLC vs. TrustIrrevocable Family TrustsWe 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.
Asset Protection PlanningPrenup vs. TrustTransfer an LLC into a TrustAs 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.