Top 4 Reasons to Consider Domestic Asset Protection Trusts

When clients have significant wealth or assets, we sometimes recommend they establish a domestic asset protection trust. Also known as a self-settled trust, this cutting-edge estate planning tool can protect your hard-earned investments from creditors and lawsuits.

Avoids Probate

A domestic asset protection trust can help your estate avoid the costly probate process after you pass away. Probate is a legal process during which an executor collects your assets, pays off any lingering debt, and distributes the remaining estate to your heirs according to the terms of your will or state inheritance laws if you die intestate.

As a relatively new legal tool, asset protection trusts generally have higher barriers to entry for creditors than other types of trusts. That’s because they must be irrevocable and spendthrift, which strips the grantor of control over the assets they place in them.

The primary goal of domestic asset protection trusts is to separate and protect assets from your gross estate to prevent them from being available to creditors. They are also a good choice for people who may become targets of lawsuits, such as business owners and professionals. They can even be used before marriage to make some assets non-marital, which offers protection if you get divorced.

Protects Assets from Creditors

A major reason to create a domestic asset protection trust is to safeguard your assets from lawsuits or creditor claims. This is especially important for individuals in careers with a greater risk of being sued, such as doctors and real estate developers. DAPTs are irrevocable trusts that can protect assets from being taken in a lawsuit by establishing an obstacle for creditors. For those looking to Plan for the Future and protect your assets, incorporating a DAPT can be a valuable part of an overall financial strategy. They are most effective in jurisdictions with laws allowing this type of trust and are less costly than foreign asset protection trusts.

However, DAPTs are not foolproof. While a DAPT may help deter some creditors, it is not a substitute for a well-rounded strategy that includes limited liability companies, insurance, and asset diversification. It is also important to establish a DAPT when you need it most before facing a lawsuit. 

Avoids Taxes

Domestic asset protection trusts, also known as DAPTs, are irrevocable trusts that offer protection from creditors, divorcees, and other parties that could seek legal action against you. While only suitable for some, they are especially helpful for people in high-risk occupations, such as business owners and medical professionals.

Unlike traditional trusts that must be carefully structured, DAPTs are self-settled and allow the person who sets up the trust (also called the grantor or settlor) to remain a beneficiary of the faith. As more states pass legislation permitting these trusts, they become increasingly common.

Another advantage of a DAPT is that it can be structured as a completed gift, lifting the gifted assets and their future appreciation out of your estate for federal and state income tax purposes. This unique combination of creditor protection, estate tax simplicity, and income tax efficiency makes these trusts particularly attractive for those with substantial professional or business liability risks.

Prevents Divorce

A domestic asset protection trust shields assets from creditors and judgments that can result from divorce proceedings. This type of trust is typically used by individuals who want to protect their wealth from the risk of a divorce, such as physicians, lawyers, accountants, business owners, investment advisors, and professional athletes.

Many states have laws allowing spouses to retain their separate property, including any assets they owned before the marriage and any gifts or inheritance they received. However, prenuptial agreements can be controversial and may not be enforceable if the terms are unfair or if the agreement was signed under duress or coercion.

A DAPT offers an alternative to prenups because it can provide the same asset protection benefits without disclosing financial information or relinquishing control of the assets and property.