Beware of Domestic Asset Protection Trusts
These are not the safest or best Asset Protection Planning Tools
The Domestic Asset Protection Trust ("DAPT") is an irrevocable
trust that allows the settlor (or creator) of a trust to be a discretionary
beneficiary. While this trust has some advantages, it should not be used
for Asset Protection as recent litigation has highlighted concerns about
the DAPT, as it is often an inadequate entity to protect assets. The DAPT
is often referred to as a "self-settled trust" because the settlor
is one of the beneficiaries. Self-settled trusts allow the trustee to
have discretion of whether to make distributions to the settlor, while
simultaneously protecting the assets from the settlor's creditors.
The primary goal of the DAPT is to protect the assets of the settlor from
their creditors. The DAPT may also allow a settlor to transfer assets
to a trust, preventing these assets from being included in the settlor's
The major disadvantages from using the DAPT as a personal asset protector
are as follows:
- In creating a DAPT, you are more susceptible to litigation on your trust
(fraudulent transfer claim) as Creditor's use this argument often
to break through DAPT trusts to get to debtor assets.
The laws of the state where the DAPT is formed will not necessarily apply
where the settlor, beneficiaries, or the trust's assets are not subject
to the jurisdiction of the state. In other words a DAPT is only valid
if the settlor and beneficiaries as well as the trust assets are
all in the DAPT state. Further, only twelve jurisdictions recognize the DAPT
– so there is little uniformity across the United States.
- State law pursuant to the Supremacy Clause of the US Constitution does
not always bind federal courts. Therefore, DAPT statutes may not protect
the settlor against judgments in federal courts or by federal administrative agencies.
- DAPT, as self-settled trusts, have a longer statute of limitations for
creditors to sue on than most other Asset Protection Tools.
On the other hand, the Limited Liability Company (LLC) and Limited Partnership
(LP) are far more adequate entities for Asset Protection planning.
See more on these entities at the following links:
If you have any more questions regarding DAPT's or any other Asset
Protection Planning tools, feel free to contact our attorneys.
YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to