If you have spent years acquiring assets and building up your estate’s value, you need to protect what you have built. One way to do that is to include asset protection planning tools and strategies in your estate plan. Toward that end, a Fargo asset protection planning lawyer at German Law Group discusses why you might include a Domestic Asset Protection Trust in your overall estate plan.
A domestic asset-protection trust (DAPT) is an irrevocable self-settled trust established under the special laws of one of the limited number of jurisdictions that allow the Settlor (also referred to as the Grantor or Trustor) is designated a permissible beneficiary and allowed access to the funds in the trust account. A properly drafted and structured DAPT prevents creditors from reaching the trust’s assets. If a DAPT were set up under the laws of a non-DAPT jurisdiction, the general rule is that the settlor’s creditors can access as much of the trust as can be distributed to the trust settlor. In addition to providing asset protection, a DAPT offers other benefits, including state income tax savings when situated in a no-income-tax state. As of 2020, 18 states allow DAPTs, including Alaska, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Note that North Dakota is not among the states that allow DAPTs.
When Does a DAPT Start Protecting Assets?
Each DAPT jurisdiction has a statute of limitations period that determines how long is necessary between the date of transfer to the DAPT and the date on which the transferred asset will be protected from the Settlor’s creditors. The number of years required before the assets are protected varies from state to state. The statute of limitations also differs for preexisting creditors versus non-preexisting creditors. In most jurisdictions, the statute of limitations period tolls for preexisting creditors to protect these creditors.
Does a DAPT Protect Assets from All Creditors?
Again, the extent to which a Domestic Asset Protection Trust will protect assets depends on the jurisdiction in which the trust is established. All the states except Nevada, however, have certain “exception creditor” statutes that allow certain classes of creditors to access the trust assets even though most creditors are barred by statute from accessing the DAPT assets.
Funding a DAPT
Like all trusts, a DAPT must be funded. Also like all trusts, you can fund your DAPT with just about any type of asset you want; however, because the goal of this particular type of trust is to protect assets, careful consideration should be paid to which assets you decide to transfer into the trust. In addition, because you should anticipate creditors to try and get past the protection afforded by a DAPT, it is in your best interest to work closely with an experienced trust attorney when deciding in which state to establish your trust and which assets to use to fund your DAPT. For example, if you wish to protect real estate owned by an LLC or other entity established in another state, care must be taken when considering not just the state where the DAPT is established, but also the state in which the property is located because a local court may try to exercise jurisdiction over the property, notwithstanding the fact that the property is owned by an out of state entity. Often, the best way to protect assets is to create layers of protection. Transferring real estate to an LLC, for instance, and then transferring the entire LLC into a DAPT creates more than one obstacle a creditor must get past when trying to get to assets.
Contact a Fargo Asset Protection Planning Attorney
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about creating a Domestic Asset Protection Trust, or about asset protection planning in general, contacta Fargo asset protection planning attorney at German Law Group by calling 701-738-0060 to schedule an appointment.