Don’t Let Creditors Steal Your Wealth!
Approximately 20 years ago, states like Delaware and Alaska became the first to create new trust laws to provide an attractive alternative for the thousands of Americans who were using offshore trusts to protect their assets. These changes allow for the creation of Domestic Asset Protection Trusts that shelter wealth and assets from creditors. With the recent addition of West Virginia, sixteen states now allow the formation of DAPTs.
A Domestic Asset Protection Trust provides a stronghold by allowing the settlor of the trust to be named as a beneficiary while barring the door to creditors. They also differ from other types of trusts by eliminating the infamous “rule against perpetuities”. That means a DAPT can continue for generations and doesn’t automatically end 21 years after the death of the last beneficiary.
Protection Against Creditors
Most trusts that are established to benefit the settlor (self-settled trusts) are included in your estate for tax purposes and are subject to claims by creditors. A Domestic Asset Protection Trust, on the other hand, lies outside the reach of most creditors. Rules differ by jurisdiction, but most states will only allow the trust to be pierced by a very narrow class of creditors which includes claims for child support or alimony. Nevada is the only state that allows no exceptions to the absolute sanctity of a DAPT.
A trust can qualify as a DAPT even if most of the assets don’t actually reside in the state. Assets typically include cash, securities, limited liability companies (LLC), real estate and other goods like air or marine craft. Many settlors transfer various assets to LLCs that are formed in the state in which they plan to create a DAPT before establishing the trust itself.
Fraudulent Transfers
In order to benefit from creditor protection, a DAPT cannot be created to transfer assets in a manner that is intended to defraud, hinder or delay an existing creditor. Transfers made after creditor issues arise can be characterized as fraudulent and set aside. In other words, the time to set up a DAPT is before problems with creditors arise.
All states allow creditors to pierce the trust if the transfer of assets is found to be fraudulent. In addition, all states provide a period following the creation of the trust within which creditors can make a claim on DAPT assets. Nevada has a two-year limit and other states can go up to four.
Transferring Assets
It is important to ensure that not all assets are transferred to a DAPT. The settlor needs to hold enough back for their own care and maintenance so that they are not entirely dependent on the trust assets for support. Withdrawals from a DAPT should be infrequent and made to meet long term strategic goals, not for the purpose of covering recurring expenses. Frequent withdrawals and the ongoing depletion of assets may attract scrutiny and the inference of fraud.
Establishing a Domestic Asset Protection Trust requires the assistance of a knowledgeable attorney who is well versed in the applicable legislation of all the states that allow this unique type of self-settled trust. Does the state levy tax on the trust? Have a lengthy statute of limitations for pre-existing creditors? Allow an exception for pre-existing torts? Require a new affidavit of solvency every time you make a transfer? The answer to these and other important questions will help you decide where, and whether, a DAPT is the right vehicle for protecting your wealth and the assets you wish to pass on to your beneficiaries.
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