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It takes money to make money.
Nothing ventured, nothing gained.
No risk it, no biscuit.
The platitudes are endless when it comes to encapsulating the entrepreneurial spirit.
Yet, for those who finally “make it” as a business owner, it can ultimately feel like the first of an endless series of hurdles.
Uncle Sam. Greedy creditors. A pending lawsuit.
There is always something threatening to undermine the wealth you have worked so hard to create.
One such tool that checks all of these boxes is a domestic asset protection trust. Keep reading as we explore domestic asset protection trusts from all angles and discuss their role in a comprehensive wealth preservation strategy.
What Is a Domestic Asset Protection Trust?
A domestic asset protection trust (DAPT) is an irrevocable trust established under the laws of certain U.S. states. It allows individuals to protect their assets from future creditors while still retaining some beneficial interest in them. For example, some DAPTs may be formed so that the trustor (aka grantor, settlor, or creator) can receive ongoing income or distributions from the trust. In addition to shielding assets from legal claims, DAPTs are a useful vehicle in passing assets to loved ones while minimizing the tax bill.
How Does a DAPT Differ from Other Trusts?
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There are two standard types of trusts: revocable and irrevocable.
A revocable trust can be modified or revoked by the grantor during their lifetime. This provides the grantor flexibility and allows them to maintain control of their assets. It also helps avoid probate court in the event of death. However, there is a major downside to revocable trusts. Since the grantor retains full control of assets, they are not considered legally separate from the grantor’s personal estate. This makes them susceptible to creditors and legal claims.
An irrevocable trust offers superior legal protection compared to a revocable trust. The trust becomes a separate legal entity from the grantor. Once assets are placed in an irrevocable trust, creditors and court judgments against the grantor cannot pursue them. This superior protection comes at a cost, however. The grantor cedes beneficial interest of the assets once placed in an irrevocable trust. This makes them primarily an option for estate planning or for people needing to show zero assets for the purpose of qualifying for government programs, such as people with long-term disabilities and unable to work.
In states that allow them, DAPTs offer a “best of both worlds” scenario. As an irrevocable trust, they are completely out of reach from creditors and legal claims. Yet, when carefully constructed by a versed asset protection attorney, the trustor can continue to enjoy beneficial interest from the DAPT, such as income distributions. They are also a particularly impactful asset protection tool for owners of LLCs who want to pass on their business and minimize their taxable estate.
When to Consider a DAPT As Part of a Wealth Protection Plan?
As you may imagine, trusts that offer some of the beneficial interest of revocable trusts while maintaining the legal inviolability of irrevocable trusts are rather attractive for those seeking next-level wealth preservation. A few situations where a DAPT offers unique utility include:
- Considering marriage – creating a DAPT to hold your personal assets guarantees that they are not part of the marital estate, thus shielding them from equitable division in the event of divorce
- Significant non-exempt assets – second homes, expensive jewelry, valuable cars and other such assets are prime targets of bankruptcy trustees. A DAPT keeps them out of the reach of creditor liens should day-to-day financial difficulties cause you to declare bankruptcy
- Professionally high-risk occupations – doctors, business owners, contractors, C-suite executives, and any other occupations at significant exposure to lawsuit should weigh the benefits of a DAPT
- Estate planning – as mentioned, owners of high-value LLCs in some states can help use a DAPT to lower their taxable estate
These are just a few of the myriad ways that a DAPT may be useful for wealth preservation. Be sure to consult with a qualified wealth attorney in your state to determine a full list of benefits that pertain to your specific needs.
Key Considerations Pertaining to DAPTs
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Although DAPTs are powerful asset protection tools, they are a few important points to consider.
There are currently fewer than 20 states that have statutes expressly permitting DAPTs. Of these, there is some variability in the types of asset protection they afford. States such as South Dakota and Nevada are notable for their generous statutes pertaining to DAPTs. With this in mind, it is crucial to consult your attorney and determine whether a DAPT is a worthwhile consideration given your state’s applicable asset protection laws.
Despite the possibility of beneficial interest, it is also important to remember that DAPTs are irrevocable trusts at heart. This means that once assets are placed in the DAPT, they cannot be revoked.
Finally, DAPTs cannot be used to circumvent any current claims. There is a statutory period that the grantor must wait before the DAPT offers full legal protection of assets.
Don’t Wait: Contact an Asset Protection Attorney Today
When it comes to asset protection, it is critical to explore every avenue to help keep what you have earned. One unique tool in this regard is a domestic asset protection trust. When carefully constructed by an asset protection attorney, it can offer inviolable defense against future creditors. For more of the latest trends in the entrepreneurial landscape, explore the resources at Business Partner Magazine for additional thought leadership!
Also read: Offshore Trusts: Avoid Challenges and Risks with Informed Decision-Making
