A Domestic Asset Protection Trust or DAPT is a type of irrevocable trust enabled by the laws of various states in the United States — including but not limited to South Dakota, Nevada, and Alaska — that preclude creditors from attaching the settlor's — the person who creates and funds the trust — rights to discretionary distributions from the trust to satisfy claims against the settlor.
What Is A Trust?
A trust is a old concept whereby a person — called a trustor, settlor, or grantor — transfers ownership or title to assets — called the trust corpus — to another person — called a trustee — for the benefit of one or more persons — called a beneficiary or beneficiaries. Depending upon the objective of a particular the trust settlor, a settlor, trustee, and beneficiary may all be the same person, while in other scenarios they may all be different people.
In general, a trust is either revocable — meaning that a trust can be terminated and the trust corpus or assets can be distributed to the trust settlor at the discretion of the settlor — or it is irrevocable — often meaning that the trust must continue until terminated by the trustee or trust beneficiary or beneficiaries per the terms of the trust.
If a trust is revocable, it will provide little to no asset protection if a judgment is entered against the trustor — a judge can simply order to the trustor to revoke the trust.
Even in the case of an irrevocable trust, if the settlor of the trust retains the right to request discretionary distributions from the trust or even just retains the right to receive distributions from the trust, it may be possible for creditors to attach the trust and its assets in order to satisfy claims against the trust settlor.
If, however, the settlor of a trust doesn't retain the significant beneficial interests associated with the trust and the transfer of assets is not considered a "fraudulent transfer" or "transfer in fraud of creditors," the creditors of the settlor can't attach the assets of the trust to satisfy claims again the trustor — it's as if the settlor gave the assets away.
How is a DAPT Different?
Unlike a traditional irrevocable trust, a DAPT can theoretically allow a trust settlor to receive discretionary distributions from the trust all while prohibiting creditors of the settlor from attaching the trust to satisfy their claims against the settlor.
Will A DAPT Work?
While courts have upheld DAPTs in the jurisdictions where they are enabled, there is little if any case law regarding DAPTs created in one jurisdiction, e.g. South Dakota, by a resident of another jurisdiction whose laws do not enable DAPTs, e.g. Arizona.
In addition, if transfers made to a DAPT were made in fraud of creditors, e.g. the settlor was insolvent at the time the transfers were made, then a DAPT will unlikely be respected because the state laws governing the DAPT that allow asset protection can be pre-empted by federal bankruptcy law.
This brief overview of some important considerations associated with the domestic asset protection trusts is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.
Steve Cook is an attorney at Cook & Cook. Although his office is located in Mesa, Arizona, he represents clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.