Domestic Asset Protection Trusts

A Domestic Asset Protection Trust (“DAPT”) is a relatively new type of trust and is now available to be implemented into a well-designed estate and wealth preservation plan. A DAPT is designed to protect and preserve the assets from risks that would endanger the assets. These trusts offer many of the same benefits of an Offshore Trust without the client subjecting his assets to many of the risks associated with Offshore Trusts.

To date, a number of states, including Delaware, Alaska, and Nevada have passed laws which make it difficult for a creditor to attach to the assets held in a qualified trust. The DAPT is an irrevocable trust, and it generally requires the use of an individual or institution within the state which laws govern the trust, to act as a trustee. Many local banks and trust companies in these states offer trusteeship services.

As mentioned above, DAPTs were designed to provide an alternative to offshore trusts, which until recently had been the only viable alternative for clients wishing to “judgment proof” themselves to the extent possible under the law. In general, the relevant Acts provide that creditors who exist after the creation and funding of the trust cannot attach to the assets of the trust so long as the trust terms are consistent with such Act. Additionally, unlike the laws of states like Florida which prohibit “self-settled” asset protection trusts, these states allow creditor protection to extend to the creator of the trust. Accordingly, a properly designed and implemented DAPT allows a client to both protect transferred assets and be a permissible beneficiary of such assets.

In addition to the creditor protection afforded by establishing a DAPT, significant estate tax savings may also be achieved. Based upon a recent Private Letter Ruling issued by the Internal Revenue Service, a DAPT may be structured to be a completed gift for federal gift tax purposes and the assets transferred into the trust may be excluded from the grantor’s gross estate for federal estate tax purposes, even if the grantor is a discretionary beneficiary of the trust.

To summarize, the establishment of a DAPT can allow a client to place their assets beyond the reach of any future creditors while remaining a discretionary beneficiary of such assets and removing the assets (and the assets’ future appreciation) from their gross estate for estate tax purposes.