13. September 2017 14:19 by Megan Kunis
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 the 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 gross estate.
The major disadvantages of 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:
- Limited liability companies
- Limited partnerships
If you have any more questions regarding DAPT's or any other Asset Protection Planning tools, feel free to contact our Attorneys.