How Domestic Asset Protection Trusts Can Protect Your Assets
Anyone can be exposed to litigation. As such, it’s crucial to plan ahead to protect your assets from potential litigation. Even after a lawsuit is filed against you, there are reliable financial strategies and tools at your disposal that you can utilize for asset protection purposes.
One of these tools is Domestic Asset Protection Trusts (DAPTs). A DAPT serves as a wealth management tool that offers asset protection in addition to state income tax savings. Here is an overview of how a well-structured DAPT can help protect your valuable assets.
What is a Domestic Asset Protection Trust?
A Domestic Asset Protection Trust (DAPT), also referred to as the United States Asset Protection Trust, is a self-settled irrevocable trust where the settlor or grantor is an designated beneficiary and allowed access to the trust account funds. This trust is set up in the United States.
If you structure a DAPT properly, this financial tool can prevent creditors, bankruptcy, lawsuits, or divorcing spouses from reaching the assets in the trust. You can fund a DAPT with cash, real estate, limited liability companies, securities, business assets such as intellectual property (IP), securities, recreational assets, and equipment and inventory.
Currently, only 17 states allow DAPTs. These states include Alaska, Hawaii, Delaware, Mississippi, Michigan, Utah, Oklahoma, Wyoming, Ohio, Rhode Island, Nevada, Missouri, West Virginia, New Hampshire, Virginia, Tennessee, and South Dakota. Florida does not currently have legislation allowing for the creation of DAPTs, but Florida residents (or residents of any other state) can still create this type of trust.
How Can a DAPT Protect Your Assets?
When you create a DAPT, you can be the primary, or even sole, beneficiary. A DAPT gives the independent trustee wide latitude to pay out as little or much of the trust's assets to any of the eligible beneficiaries as they deem appropriate.
The key to this type of asset protection is that the independent trustee bears the discretion to distribute or choose not to distribute the trust assets. Creditors can only access the assets that the beneficiary has the legal right to receive. As such, the assets in the trust are not considered the beneficiary's property, and any creditors of the said beneficiary will be unable to touch the assets.
However, it's important to note that a DAPT can only protect your assets if several conditions are met. The transfer into the DAPT must not be fraudulent, and the grantor must not reserve a right to revoke. A court may consider a trust transfer fraudulent if the transfer is made after the threat of a lawsuit or creditor action.
The trust must be irrevocable and spendthrift. The spendthrift clause prevents the trust beneficiary from assigning their interest to another party. You must appoint at least one resident trustee, and a significant degree of trust administration has to be conducted in the respective state. Also, the trust grantor cannot act as a trustee.
The trust instrument must not require the distribution of the trust principal or interest to the grantor. Each state allows DAPTs to enforce a statutory waiting period from the time an asset is transferred to the trust to when the asset will be protected from creditor claims. It’s advisable to structure your asset protection strategy well in advance of creditor issues.
The participating state’s DAPT statute of limitations laws will govern the assets in a DAPT. The statute of limitation determines the period during which the assets in the trust are protected from the grantor's creditors. To provide more protection, you should formulate your DAPT to have a substantial relationship to the state it's created and not your resident state.
If another non-DAPT state is allowed jurisdiction over the assets in a DAPT, that state’s laws may be applicable and circumvent the DAPT protections. The location of the assets in the trust could determine a closely contested legal battle. If a different jurisdiction passes a valid judgment, the DAPT state has to provide that judgment full faith and credit as the U.S constitution stipulates.
Who is Eligible for a DAPT?
The state of Florida doesn’t allow DAPT. If you are a resident of Florida, you can still take advantage of the protective legislation around DAPTs. For instance, if you seek to establish a DAPT, you have the option to determine the state laws that will govern the DAPT, even if the state isn’t your home state.
To facilitate this kind of trust, you must take the appropriate legal steps to ensure Florida’s governing laws are respected in the state you wish to open the trust in. The Full Faith and Credit clause provides that every state must offer full faith and credit to every other states’ legislation. It’s advisable to seek legal help to determine the proper jurisdiction that serves your needs best.
Generally, a DAPT will offer you more protection if the assets in the trust are situated in the DAPT state. If more of your assets are situated in Florida, there’s a higher chance Florida laws will apply in case of litigation, and you may not be afforded sufficient protection.
Following this crucial step, you can establish the trust and find an independent trustee residing in the state of jurisdiction. This trustee will transfer the assets you seek to protect and make the deposits in your selected DAPT state. You can enlist the services of an asset protection planner to assist you in understanding the applicable tax requirement for non-resident trust grantors subject to the laws of the jurisdiction state.
Overall, a Domestic Asset Protection Trust can function as a crucial estate planning tool. Your assets are vulnerable to potential creditors if you fail to implement a well-informed asset protection strategy. Misfortunes can befall anyone- lawsuits, taxes, and other financial risks are facts of life. You could lose everything if the worst happens. With proper forethought and expert financial and legal advice, you can leverage DAPTs to safeguard your wealth should unfortunate events happen to you.