There are a lot of aspects of estate planning that can make it feel daunting. To protect your beneficiaries from creditors, you should consider establishing a domestic asset protection trust or DAPT. Here define DAPTs, talk about how they work and cover which states allow them. If you’re trying to determine what type of trust you may or may not need for your personal situation, consider working with a financial advisor.
What Is a Domestic Asset Protection Trust?
A domestic asset protection trust is a type of trust that protects an estate’s assets from lawsuits, creditors and other legal action. You can think of them as setting up an offshore bank account but with less protection and far fewer administrative costs.
These types of trusts were first established by Alaska in 1996 and have spread to 17 other states since. With a DAPT, a grantor creates the trust and is allowed access to the trust’s assets. If the trust is set up correctly, you (as the grantor) are able to add and remove assets from it while keeping the assets separate and inaccessible to others.
DAPTs are irrevocable, meaning the grantor can’t make changes to the trust after it’s created. However, they’re special in that the grantor can also be the beneficiary. Their specifics can vary by state law, as the states that allow them differ slightly on what they can and can’t do (more on that below).
Characteristics of a Domestic Asset Protection Trust
While DAPTs are different from state to state, their main characteristics are the same. Here are some of the common characteristics of domestic asset protection trusts:
- DAPTs are irrevocable and spendthrift, meaning the grantor can’t change the trust after it’s created and they control the assets in the trust.
- DAPTs can be comprised of cash, securities, real estate, business assets and other assets.
- One trustee must reside in the state where the DAPT is established and the trust must be administered in that state.
What Is the Primary Goal of a Domestic Asset Protection Trust?
The primary goal of a DAPT is to protect the grantor’s assets in case of legal action and to deter that legal action in the first place. They can also be used to separate and protect funds from a gross estate, which can have some uses. One use is that a DAPT can be created prior to marriage to make some assets non-marital. This can offer some protection if divorce occurs.
Which States Allow Domestic Asset Protection Trusts?
DAPTs aren’t available to be created in every state. Here are the states that, as of April 2023, allow domestic asset protection trusts:
Of those states, Alaska, Nevada, Utah, South Dakota and Delaware are generally regarded as having laws that are the most friendly to debtors. Many states on this list have recently joined the ranks of allowing domestic asset protection trusts.
How DAPT Laws Vary By State
DAPT laws vary from state to state. Some states are more favorable to debtors, while others have longer waiting periods. Nevada, for instance, is unique in that it’s only one of two states with no exception creditors. This means no creditors can gain access to DAPT assets after the statute of limitations period. Other states allow exceptions creditors, which means less protection.
While there are different legal opinions on setting up out-of-state DAPTs, you should start by researching DAPTs in the state where you reside. If the asset resides in another state, like if you own real estate in Utah, for example, look into DAPT laws there. Before proceeding, consult with a qualified lawyer that specializes in trusts.
Domestic Asset Protection Trust Pros and Cons
Like with any financial decision, there are advantages and disadvantages. Here are some of the pros and cons of domestic asset protection trusts that you should be aware of:
- Can deter legal action: If you’ve set up a DAPT, in order for someone to pierce the DAPT and collect the assets, they’re going to have to take legal action. That costs them time, money and effort. This alone can protect you from litigation.
- Can cause a settlement: If a creditor wishes to collect, but doesn’t want to go to court, they may propose a settlement. This can be for a much lower amount than the debt you owe.
- Can protect assets in the case of divorce: If you created the DAPT prior to marriage, these assets can be protected if you get divorced. In some states, this can even prevent or reduce alimony payments.
- Different states have different laws: What happens in one state may not be recognized in another. There can be confusion over who has jurisdiction where which can lead to a lot of litigation and legal fees.
- Doesn’t apply in the case of federal law: Federal laws trump state laws. Assets in a DAPT won’t be protected in federal court.
- No guarantee of privacy: DAPTs can help protect your assets, but they won’t protect you from subpoenas and other court orders. As a trustee, you will need to comply with the court or face being held in contempt
The Bottom Line
Domestic asset protection trusts are a type of irrevocable trust that offers some protection from creditors, divorcees and others threatening your assets with legal action. They were created by Alaska, originally, but have since spread to be used in 20 states. While the specifics of their scope and effectiveness vary, they can be a useful deterrent against litigation. Each state operates its DAPTs differently, with different statutes that define the level of protection. If you need a DAPT, it’s worth doing a cost-risk analysis.
Estate Planning Tips
- You may need a comprehensive financial plan and investment strategy to make the most of your estate and a financial advisor can help you with both. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- It’s not easy to think about, but you may get to the point where you’re unable to make decisions for yourself. A living will can ensure your family knows your wishes in this situation.
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