Domestic Asset Protection Trust (DAPT)

Domestic Asset Protection Trust (DAPT)

The Domestic Asset Protection Trust is a self-settled spendthrift trust that allows the Settlor to be the Primary Beneficiary during his or her lifetime. This is the only type of domestic irrevocable trust that allows for this, and it is modeled after the Offshore Asset Protection Trust. This is very new law; legislation recently passed and is currently available in eleven states. Our law firm favors Nevada because Nevada has traditionally supported business owners’ rights to privacy and lawsuit protection for many of their business entities through its legislation. Therefore and most importantly, the judiciary (the court that would be making the decisions about your case) is predisposed to and experienced in accepting these rights that other jurisdiction courts are not experienced with. Also, the Nevada Domestic Asset Protection Trust law has a two year statute of limitations on attacking the transfer to the trust, whereas most other states have a four year statute of limitations. This is a very important and powerful plus of using Nevada for these trusts.

Some advantages to using a Domestic Asset Protection Trust are the shorter statute of limitations for fraudulent conveyance and the Settlor/Beneficiary structure. We also recommend that clients have us draft these with the decanting provisions that allow the trust to move offshore in the future if it is appropriate for the client.

Statute of Limitations: If assets are transferred to the trust prior tohaving a known, existing creditor, there is a two year statute of limitations on filing a claim against the transfer. That is, the creditor must make a claim against the transfer within those two years. If a creditor does not file a claim prior to when the statute of limitations runs out, the creditor is too late, and will not be successful in accessing the assets owned by the Domestic Asset Protection Trust. The statute of limitations is different if assets are transferred after the Settlor has a claim against him. That is why it is important that an asset protection strategy be put in place before you have any known, existing creditors.

Settlor/Beneficiary structure: With the Domestic Asset Protection Trust, the Settlor can also be the Primary Beneficiary. This is not the case with traditional lawsuit proof trusts in the United States. Distributions can be made to the Settlor/Beneficiary by a Special Trustee to keep the integrity of the irrevocable trust as necessary. The Settlor can still legally control all assets through any underlying entities.

Decanting provision: The decanting provision states that the assets in the Domestic Asset Protection Trust can be transferred to a Family Trust in an offshore jurisdiction in the future. This gives the Settlor an opportunity for stronger asset protection down the line when it is financially feasible.

The Domestic Asset Protection Trust is a budget friendly alternative to the Offshore Asset Protection Trust (OAPT), and it mirrors the more favorable provisions and laws of the offshore trust like the two year statute of limitations and the Settlor/Beneficiary structure.

While the Domestic Asset Protection Trust does somewhat mimic the Offshore Asset Protection Trust, it does not afford the same level of protection as the offshore version. As any professional that is an expert in this arena will tell you that the two most pronounced drawbacks to the DAPT are:

(1) that the U.S. court still has jurisdiction over your trust (whereas under U.S. law, the U.S. courts no longer have jurisdiction over an offshore trust), and
(2) that the Domestic Asset Protection Trusts are so new (and only eleven states have legislated) that there is no court precedent that would give you certainty that they would be upheld.

These points do not diminish their utility, but are significant and material issues to consider when deciding to use a Domestic Asset Protection Trust for your circumstances. The Offshore Asset Protection Trust is the strongest asset protection tool available, and should not be overlooked simply because there is a domestic alternative.