Let me start by defining what “DAPT” stands for…Domestic Asset Protection Trust. Still confused by what it means? Many are as it isn’t something that is simple and easy to understand in the first pass. I will hopefully help you understand it better and offer you some ideas on how it can be used so you can see if it might be a helpful tool for you to have available.
It is something that is getting more and more attention. To date, seventeen states now allow for formation of self-settled Domestic Asset Protection Trusts (“DAPTs”). Those states are Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. So what exactly is it and how does it really work?
What is a DAPT?
There are 4 key areas to DAPT…let’s explore each of these so you have a better understanding of what they are and how they work.
1
Trust is Domestic
The trust is domestic rather than international. In other words, it’s set up in the United States. There are offshore asset protection trusts, which have their own set of issues. But domestic trusts cost less to set up and administer and are not subject to the political and other risks of offshore jurisdictions.
2
No Beneficiary Assignment
The trust doesn’t allow the beneficiary to assign their interest in the trust to someone else. In other words, it includes a “spendthrift” clause which allows for asset protection.
3
Usually Completely Discretionary
The trust doesn’t provide a standard which allows a creditor to force the trustee to make a distribution to them. In other words, the trust is typically completely discretionary. A trust with an ascertainable standard, like a trust with a distribution standard like “health, education, maintenance, and support” would allow a creditor (standing in the shoes of the beneficiary) to force the trustee to make distributions falling within that standard.
4
Trust is Self-Settled
The trust is self-settled. In other words, the assets going into the trust came from one of the permissible beneficiaries of the trust. In most states, such a trust can be pierced by a creditor of the grantor/beneficiary, i.e., the person setting up the trust. However, in the seventeen DAPT states listed above, the creditors cannot do so, as long as the rules have been followed.
Every State Does its Own Thing
Each state has its own rules. Typically, in order to obtain the protections of the state law, the trust must be administered in the state by a trustee who is a resident of the state or by a corporate fiduciary in that state. The transfer into the trust must not be a fraudulent transfer (in other words you cannot already be in the throes of a litigation or served with a lawsuit or have filed bankruptcy when you create the trust). However, typically the DAPT states have statutes which make it more difficult to show a transfer was a fraudulent transfer.
However, if another state gets jurisdiction over the DAPT or its assets it could apply its own law and attempt to pierce the protections of the DAPT. An example of this would be a DAPT trust owning land in a non-DAPT state. In that situation, a court in the non-DAPT state where the land is situated could get in rem jurisdiction over the asset and satisfy a judgment by seizing the property.
If another jurisdiction issues a valid judgment, in theory the DAPT state must give that judgment full faith and credit, as stated in the U.S. Constitution. However, the ins and outs of this issue as applied to DAPTs have not been fully resolved yet by the U.S. Supreme Court.
DAPTs have been spreading to more jurisdictions and are more common. However, recent legal cases, like Toni 1 Trust v. Wacker, 413 P.3d 1199 (Alaska, March 2, 2018), have been chipping away at the protections of the DAPT. In Toni 1 Trust, the court refused to apply an Alaska statute (AS 34.40.110(k)) which provided exclusive jurisdiction to Alaska courts over fraudulent transfer claims against Alaska DAPTs. In Toni 1 Trust, the Alaska court refused to set aside a judgment from a Montana court on the theory the Montana court didn’t have jurisdiction due to the Alaska statute.
While DAPTs provide protections, one should also consider other ways to protect assets against the claims of creditors, such as having high quality liability insurance, umbrella coverages and relying on other statutory protections that exist in some states for retirement plans and life insurance.
This is another option to discuss with your attorney. If you don’t have one that knows about DAPTs or if you would just like a different viewpoint on how it may or may not work for you, just let me know. My recommendation is to set up a meeting and go through the details so you can make a “less risky” decision. If you don’t have one you feel would understand this for your situation, feel free to ASK ME YOUR QUESTION or CONTACT ME and I can give you some insight and assistance to help you understand how it can affect you (positively or negatively) and help you get this done right away if necessary.
I hope this has been helpful. If you do the proper work on this, I can guarantee you will have NO. MORE. TEARS. A little bit of effort here can help you sleep much better at night knowing you understand it better and you know how it can affect you and/or your business(es).