What if you could take a portion of your hard-earned wealth, lock it up from your creditors, but keep the key for yourself? It sounds too good to be true, but the Domestic Asset Protection Trust provides a very real and very valuable estate planning tool for achieving this objective.
The Domestic Asset Protection Trust, commonly referred to as a DAPT, is a type of spendthrift trust, created by statute, for the benefit of the Trustmaker. A spendthrift trust is an irrevocable trust containing certain legalese that prevents the creditors of a trust beneficiary from accessing the trust assets to satisfy the debts of the beneficiary. Traditionally, spendthrift trusts were a tool used to protect an irresponsible person from spending their inheritance. While this is still a very common use of the spendthrift trust, more and more states are allowing individuals to utilize spendthrift trusts to protect themselves from future creditors.
Of course, there are just a few catches and hoops to jump through to achieve this type of asset protection, but, in many cases, they are well worth the time and hassle. The following information should be considered in your evaluation as to whether or not a DAPT is right for you:
1.First, only some states currently recognize DAPTs. Alaska, Delaware, Nevada, South Dakota are generally considered by practitioners to be the best jurisdictions for individuals to “lock up” their assets. Indeed, Nevada’s statute even protects your assets from a divorcing spouse. If you don’t live in one of these states, your estate planning attorney can work with a Trust Company or Attorney in one of these other states to set one up for you.
2.Second, the trust is generally ineffective as to creditors of a Trustmaker that exist at the creation of the DAPT. The DAPT becomes effective as to future creditors within a period defined by the law of the state in which it was created (generally 2-4 years). If a creditor becomes a creditor of the Trustmaker after the Trust is established, but before the period expires, they can make a valid claim against the trust assets until the time period expires.
3.Third, unlike with the commonly used Revocable Living Trust, the Trustmaker should not serve as the Trustee of a DAPT. Typically, you will want an independent or institutional Trustee to serve as Trustee, and there will be an annual management fee. The Trustee will distribute to the Trustmaker and other named beneficiaries with discretion.
Because DAPTs are a relatively new estate planning tool, there have only been a very limited number of cases where creditors have attempted to reach the assets of the Trustmaker of the DAPT, and they have generally related to fraudulent transfers and statutes of limitations. We look forward to seeing how this trend can benefit our clients in the future.
If you would like to consider creating a Domestic Asset Protection Trust, please contact Frost & Associates, LLC today.