Alaska and Delaware promote domestic asset protection trusts (DAPTs). Are they more protective than others?

Alaska, Delaware and a few other domestic asset protection trust (DAPT) jurisdictions encourage the formation of trusts in their states. These DAPT jurisdictions promise added estate planning and asset protection benefits. It is a good idea to explore the estate tax advantages of these DAPTs – particularly if their state has an inheritance tax. DAPTs are primarily promoted as alternatives to the international trust. Undoubtedly, some Americans are more comfortable with a U.S.-based trust rather than an international trust. This appears to be the DAPT’s chief selling point. Several other states also have good DAPT laws. For instance, Rhode Island, Colorado and Nevada have excellent DAPT laws. But in most respects, the DAPT laws of Delaware, Rhode Island, Nevada and Alaska closely compare.

DAPTs offer certain estate planning advantages but DAPTs aren’t, in our opinion, always sufficiently protective. For example, DAPTs won’t necessarily protect you against present creditors. And DAPTs are far less protective than international trusts because an international trustee won’t enforce U.S. judgments or court orders. On the other hand, state trustees must constitutionally recognize and enforce judgments and court orders from other states. For example, if an asset that you transfer to a DAPT is ruled a fraudulent transfer in your state, the trust assets are likely recoverable by a creditor who challenges the transfer in the trust state. If you do set up a domestic asset protection trust, then, at the very least, include within the trust a ‘migration’ clause, which allows you to relocate the DAPT to an international jurisdiction if there’s a creditor challenge. DAPTs also have restrictions – such as residency requirements. Your money, the trustee, the settlor (or all three) must usually be situated within that DAPT state.

The major advantage of the DAPT is that they can be self-settled; that is the grantor can also be a beneficiary. This arrangement, in these DAPT states only, does not detract from the trust’s protection as it would in all other states. On the downside, many asset protection planners believe that the DAPT would still be vulnerable to a creditor who can claim a fraudulent transfer. Since it is a relatively new entity, we will have to wait and see how protective the DAPT is in practice. In the meantime, we continue to prefer the international trust.