A Domestic Asset Protection Trust (DAPT) provides one of the highest levels of asset protection planning without going “offshore” (planning in a foreign country). The DAPT is an irrevocable trust with spendthrift provisions. In regular English, this is a legal fiction (the trust) allowing a person to shield their assets from lawsuits and creditors. Unlike most irrevocable trusts, you are not completely giving up the use or benefit of the assets in the trust.
How is this possible?
In DAPT states, the trust is created with an independent trustee who administers the trust’s assets. An independent trustee is key to the DAPT. If a person creates an asset protection trust, but still maintains control of its assets as trustee, than the assets will not be protected from creditors. This is because if the person who created the trust can still control the distribution of the assets, then they can be ordered to make a distribution for creditors. An independent trustee makes discretionary distributions, which means the trustee is not bound to make a distribution if it will be going to a creditor.
What states are Domestic Asset Protection Trust states?
DAPTs have been around for some time now. State statutes (laws) created these types of trusts in order to compete with Foreign Asset Protection Trusts. These States thought it would be better to have people keep their money and assets in the United States, so the DAPT was created to provide an alternative to going abroad. The following states have DAPT statues: Alaska, Delaware, Hawaii, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. Best part? Domestic Asset Protection Trusts are cheaper to establish and maintain than their foreign counterparts.
So how would you use it in your own life? One popular use for DAPT is as a tool for protecting the equity of a personal residence. The DAPT is also popular among professionals like doctors, accountants, wealth advisors, attorneys, dentists, chiropractors, business owners, and any other profession with malpractice liability.
The laws vary by state, but certain assets like child support, divorce settlements, and fraudulent transfers are not protected in a DAPT. There is also a waiting period for creditor protection after a DAPT is created. So if you wait until there is a lawsuit pending, you’re too late to create a DAPT. They generally need to be created 2-4 years in advance of any legal trouble.
Also, just because your State doesn’t offer a DAPT statute does not mean that you can’t take advantage of these provisions.