DAPTs have become increasingly popular with clients seeking protection from heavy creditors or lawsuits. A DAPT can shield both personal and business assets.
This type of trust can also be useful for individuals in high-risk professions or businesses or to protect their assets for Medicaid eligibility. However, DAPTs only work in states that recognize them.
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What is a DAPT?
DAPTs are specialized irrevocable trusts, and they have become one of the cutting-edge tools in the asset protection arsenal. DAPT statutes vary widely from state to state, but generally, they allow individuals to shield assets from creditors.
A DAPT may include cash, securities, real estate, and other personal property. The settlor can retain rights in the DAPT, including controlling investments and veto distributions. Moreover, under the laws of some states (including Nevada), the settlor can remain a beneficiary of the DAPT.
Creditors can challenge the transfer to the DAPT, but they have a harder time than with simple transfers because they must prove by a higher standard of proof that the transaction was fraudulent. Specifically, they must show that the settlor intended to defraud their creditors. Consequently, the creditor must spend three times as long trying to obtain the assets from the DAPT. During this period, the creditor can only pursue a claim for outstanding damages at the time of the transfer to the DAPT.
What are the Benefits of DAPTs?
Domestic asset protection trusts offer a degree of protection against creditors and lawsuits. They also provide privacy and may offer tax advantages, depending on jurisdiction.
Created in Alaska, DAPTs are now recognized by 20 states. A DAPT is an irrevocable trust that separates your assets from yours, making them inaccessible to future claimants or creditors. It can hold cash, stocks, real estate, or other property. It must contain a spendthrift clause and require a qualified affidavit upon creation. The primary benefit is that a DAPT can protect your assets from lawsuits and creditor claims. However, it needs to be more foolproof, and the laws of your jurisdiction limit the protections offered. The key to protecting your assets is severing the connection between you and them. DAPTs do this by placing the assets in an irrevocable trust controlled by a third-party trustee. The trustee must follow the rules outlined in your trust documents.
Who Should Consider DAPTs?
DAPTs are particularly useful for doctors, lawyers, accountants, business owners, professional athletes, and celebrities. These individuals have unique exposure to lawsuits and creditor claims due to their professional lives. By removing assets from personal ownership and placing them in a specialized irrevocable trust with a third-party trustee, it is nearly impossible for creditors to snatch those assets.
Those who are considering a DAPT should set it up far in advance of any potential threat. Putting assets into a DAPT right before a lawsuit could cause a judge to rule the transfer was fraudulent. Depending on the jurisdiction, a DAPT can protect preexisting and future creditors (with claims before the transfer). Different jurisdictions also have statute-of-limitation periods, determining how long it will take for full protection to kick in.