Domestic Asset Protection Trusts are an effective estate planning tool for high-net-worth individuals and professionals with liability concerns (like doctors and lawyers). These trusts protect against future lawsuits.
DAPTs are self-settled trusts that shield assets from creditors and divorce claims. Currently, 17 states offer DAPT legislation.
Taxes
Domestic Asset Protection Trusts (DAPT) allow you to move money and property into an irrevocable trust, severs the direct legal link between your assets and your name, making them off-limits to creditors or lawsuits. You can include cash, investment accounts, raw land, and personal property in a DAPT.
You can also set up a DAPT to avoid probate, which is a costly and lengthy process for your heirs. Speaking with an estate planning expert is important to ensure you follow the appropriate steps for your state.
An experienced financial advisor can help you build an estate plan that includes a DAPT and protects your assets from creditor claims, divorce proceedings and civil actions. SmartAsset’s free tool can match you with up to three financial advisors with expertise in your area.
Creditors
For high-net-worth individuals, protecting assets from predatory lawsuits is important. Litigation is often motivated by monetary compensation rather than actual legal claims, and attorneys for plaintiffs have deep pockets.
One of the most powerful tools available to help protect personal assets against creditors is a domestic asset protection trust. These irrevocable self-settled trusts allow individuals to transfer assets into their name, then make them “spendthrifts” to limit access to help for anyone other than the beneficiaries named by the grantor.
DAPTs must be funded to maximize their benefits when the assets are least likely to be subject to lawsuits or other creditor claims. A skilled estate planning attorney can advise individuals when to fund a DAPT.
Divorce
For families with substantial assets, a Domestic Asset Protection Trust (DAPT) offers a variety of benefits. These “self-settled” trusts allow people to transfer the legal title of designated assets into the trust, which protects the assets from future creditors and even divorce claims.
A well-structured DAPT shields the assets in the trust from most creditors, except specific “exception creditors” that vary by state. In addition to asset protection, a DAPT may reduce state income taxes in the trust’s jurisdiction.
An estate planning attorney can help determine the best state and jurisdiction for a DAPT. This strategy has its challenges, however. For example, some states hesitate to honor DAPTs established in other states. Nevertheless, it remains a viable option for many high-net-worth individuals.
Estate Taxes
Domestic asset protection trusts (DAPTs) can effectively achieve those goals for high-net-worth individuals with substantial assets or financial interests to protect. When used properly, DAPTs are irrevocable trusts that shield assets from creditors’ claims.
They are particularly attractive to professionals with high-risk occupations, such as physicians and attorneys, who can be sued for malpractice or other claims related to their professional activities. They also serve as an estate tax planning tool by reducing the amount of assets subject to federal and state death taxes.
DAPTs can be formed in any of the seventeen states that allow them (South Dakota, Nevada and Delaware are the most popular locations). However, there needs to be more case law regarding DAPTs from out-of-state residents, so those interested in this strategy should work with an experienced trust attorney in the jurisdiction where they plan to establish their DAPT.
Insurance
DAPTs, now legal in 17 states (including Alaska, Delaware, South Dakota and Nevada), allow individuals to legally separate their assets from their names and protect them against future creditors. This type of protection can also help deter potential lawsuits in the first place by demonstrating that there are financial safeguards in place.
Protecting their estates from taxes and creditors is critical for high-income professionals and high-net-worth families. A DAPT is an irrevocable trust that can shield assets from personal creditors while allowing the trust owner to retain control over and benefit from the property. It also offers protection against legal complaints, malpractice claims and other financial risks. Contact us to learn more about establishing an asset protection strategy for yourself and your family.
