For years, we were hesitant to recommend Domestic Asset Protection Trusts (DAPTs). The reason? Because they were so new and untested in the courts. But, as time passes, it’s become clear that a DAPT can be a useful part of your wealth protection plan… but only under the right conditions, and perhaps not for the reasons you might think.
In this article, we’ll talk about what they are, what states support them, and whether they should be a part of your planning as well.
What is a Domestic Asset Protection Trust?
A Domestic Asset Protection Trust (DAPT) is generally an irrevocable trust established under the laws of a specific state. The person who creates and conveys assets into the trust can be a trust beneficiary, but the assets are officially protected against many types of creditor claims. A few states permit DAPTs to be revocable, but the most protective DAPTs are irrevocable.
What’s the difference between a revocable trust and an irrevocable trust?
A revocable trust allows the person funding the trust (the “grantor” or “settlor”) to close the trust and/or pull out assets at any time in the future.
An irrevocable trust makes transferred assets very hard, if not impossible, to pull out once transferred.
Revocable trusts are great flexible tools for estate planning. But they don’t offer asset protection. Irrevocable trusts are quite inflexible but are much better for asset protection (if set up properly).
Domestic Asset Protection Trusts try to be a bit of both — to offer asset protection but still have some flexibility built-in.
Historically, there was one big exception to asset protection in an irrevocable trust. That was if the settlor named themselves as a beneficiary or possible beneficiary.
But in the late 1980s, that started to change. The Cook Islands, a small island chain in the Pacific Ocean, amended its trust laws such that a settlor named as a beneficiary of a Cook Islands trust would have asset protection.
This innovation was very popular. Within a few years, many wealthy Americans were forming what become known as asset protection trusts.
Many other countries amended their trust laws to provide asset protection to a settlor named as a trust beneficiary. And in 1997, Alaska became the first state to offer what became known as “domestic asset protection trusts” (DAPTs). Today, more than 20 states have such laws in effect.
DAPTs are very effective at deterring litigation. But if you are sued, a determined creditor would have an easier time enforcing a judgment against a DAPT than an asset protection trust formed in another country.
That’s because a US court has very few tools available to enforce a judgment against the assets in a foreign asset protection trust, especially if those assets are outside the United States.
Domestic Asset Protection Trust Roles
As with all trusts, there are “roles” to be aware of.
Settlor (in a few states, the Grantor): This is the person transferring assets into the trust. That’s you.
Trustee: This is the person or entity that administers the DAPT assets and is considered their legal owner. In most DAPT states, the settlor may not serve as the trustee. And there’s significantly greater legal protection if you name someone else as a trustee. Whoever you name as the trustee of a DAPT must generally reside in the state in which you form it.
In most states, you can’t serve as the trustee of your own DAPT. Even in states where you can, this arrangement substantially weakens asset protection.
Beneficiary: This is the person (or people) who benefit from trust assets. It’s usually the settlor, as well as family, friends, or charities that are part of your estate planning.
Beneficiaries of a DAPT usually have no control over the trust assets and cannot demand assets from them (as distributions). They receive benefits as determined by the trustee according to what’s laid out in the trust instrument — the agreement that governs the trust.
Unlike most trusts, a DAPT allows the settlor to be a beneficiary of the trust while still protecting the trust’s assets from their creditors.
Under normal circumstances, you can’t give assets to a trust and be a beneficiary — and still get asset protection.
But, states with a DAPT statute allow you to do exactly that.
How does a Domestic Asset Protection Trust Fit into a Wealth Protection Plan?
Depending on the state you live in, a Domestic Asset Protection Trust can be an effective wealth protection tool. However, it’s best used if you meet at least one of the following:
- You live in a state with DAPT law (see the full list below).
- You live in a state without a DAPT law but have assets in a state with such a law.
If you don’t meet at least one of these criteria, your DAPT might not be able to provide the protection you think it will.
Forming a DAPT involves creating an irrevocable trust under the laws of a state that recognizes DAPTs. This typically involves drafting a trust agreement, appointing a trustee, and transferring assets into the trust.
What Makes it Different than Other Trusts?
DAPTs are different than other trusts because they attempt to marry the flexibility of a living trust (a common estate planning tool) with the asset protection of an irrevocable trust (a common asset protection tool).
In practice, these are competing interests. But in states with DAPT laws, the concept can work.
Traditional irrevocable trusts don’t provide asset protection to the person creating the instrument if they’re named as a beneficiary. The trust is generally set up as a “spendthrift discretionary” trust.
“Spendthrift” refers to a trust that gives an independent trustee full authority to decide how the trust funds are spent. “Discretionary” refers to the ability of a trustee to withhold a distribution. For instance, the trustee could withhold distributions to a beneficiary who is a defendant in a lawsuit, such as a divorce.
DAPTs are designed as spendthrift discretionary trusts. The difference between a DAPT and a traditional irrevocable trust is that with a DAPT, the settlor can also be a beneficiary.
Pros of a DAPT
- In theory, a DAPT lets you protect your assets from creditors without giving up control. In practice, the courts in many places haven’t smiled too kindly on such strategies.
- But having a DAPT in the mix has been proven to scare off creditors (and their lawyers). It can be risky to go to court against a DAPT. Creditors are often more willing to settle… sometimes for pennies on the dollar.
Cons of a DAPT
- DAPTs don’t work well across state lines: If you live in a state without a DAPT statute and set one up in a state that does, unless the asset in question has a very clear connection to the DAPT state, a court in your home state may ignore the DAPT entirely.
- Court cases are mixed: So far, the record on DAPTs as an asset protection tool is mixed. Even courts in states with DAPT laws haven’t always upheld their protective features.
- Be aware of fraudulent transfer: It’s very important to follow fraudulent transfer rules (in some states, referred to as fraudulent conveyance rules). In brief, if you transfer assets to a DAPT or otherwise make them unavailable to a known creditor, a court can reverse the transfer. In some states, and in federal bankruptcy cases, civil or even criminal penalties may apply to fraudulent transfers.
Are DAPTs Private?
How private a DAPT is will differ from state to state. But trusts formed in the United States generally don’t need to be registered with any authority. In fact, that’s one of the reasons people set them up.
What About a Bridge Trust?
A Bridge Trust is an asset protection tool that promoters say combines the strengths of both domestic and offshore asset protection trusts. In theory, a Bridge Trust offers the best of both worlds — but does it work in practice? Understand the pros, cons, and costs involved and find out if a bridge trust is right for you.
What Types of Assets Can Be Placed into a DAPT?
You have a lot of flexibility on what assets you can put in. Stocks, bonds, real estate, antiques and other collectibles, as well as vehicles (car, boats, planes, etc) are all pretty common.
Costs and Fees
The cost of setting up a DAPT can vary depending on how complex the trust is, the value of the assets being protected, and the fees of the attorney drafting the trust agreement. It’s best to consult with an attorney for a more accurate estimate.
Generally, though, minimum costs in most states start at a few thousand dollars.
There may be annual maintenance requirements and fees for a DAPT, including trustee fees. There may also be legal or administrative costs associated with managing the trust.
DAPTs and Taxes
The tax implications of a DAPT can be complex and may vary depending on the structure of the trust and the assets involved. In most cases, a DAPT is set up as a “grantor trust,” which means the grantor/settlor is taxed on the income or gain of the assets in the trust, as if it didn’t exist. It’s important to check with a tax professional to understand the specific tax consequences.
Top Estate Planning Tools for Asset Protection
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States with Domestic Asset Protection Trust Laws
Alabama
Governing Law: Alabama Qualified Disposition in Trust Act
Summary:
- Alabama Qualified Disposition in Trust Act: Enacted in 2021, the Alabama Qualified Disposition in Trust Act allows for the creation of Domestic Asset Protection Trusts (DAPTs) in the state.
- Requirements for DAPTs: The trust instrument must state that it is governed by Alabama law; be irrevocable; and contain a spendthrift provision. A DAPT must be administered by an Alabama trustee, who must be an Alabama resident, an organization authorized to act as a trustee by the state, or a federally chartered bank or savings and loan institution. The trustee must hold at least part of the trust assets within Alabama.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, in most cases there is a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to child support or certain tax liabilities. There is also no protection in divorce claims in which the settlor transferred assets to the trust 30 days or less before the marriage began.
Alaska
Governing Law: Alaska Trust Act
Summary:
- Alaska Trust Act: Alaska allows for the creation of Domestic Asset Protection Trusts (DAPTs) under the Alaska Trust Act.
- Requirements for DAPTs: The trust instrument must state that it is governed by Alaska law, unless it is being transferred from a non-Alaska trustee to an Alaska trustee. It must also be irrevocable and contain a spendthrift provision. For stronger protection, the trustee of a DAPT should be Alaska-resident, but this is not required by the statute. It is also suggested that some or all of the trust assets be held in Alaska and that the trustee materially participate in the trust’s administration, but this is not a requirement.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a four-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to child support or divorce if settlor was 30 days or more in default of making payment at time of transfer of assets to the trust. It also does not protect against certain tax liabilities.
Arkansas
Governing Law: Arkansas Code Title 28, Chapter 72, Subchapter 7
Summary:
- Arkansas Code Title 28, Chapter 72: Enacted in 2023, subchapter 7 of this statute governs the operation of DAPTs in the state, regardless of whether the trust was created in or outside the State of Arkansas.
- Requirements for DAPTs: A DAPT must be irrevocable, give discretionary authority over distributions for the benefit of the settlor to a qualified trustee, and not be intended to hinder, delay, or defraud known creditors. If the settlor of a DAPT is also a beneficiary (which is the essence of a DAPT), the DAPT must have at least one trustee that is a resident of or domiciled in Arkansas, or a trust company or bank maintaining an office in the state. Some exceptions apply to trusts transferred to an Arkansas trustee from a non-Arkansas trustee.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is a generally a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets if created to hinder, delay, or defraud known creditors. However, no spouse, former spouse, child, or dependent is deemed a beneficiary unless such individual is named or clearly referred to in the trust instrument. But a DAPT will not protect against certain tax liabilities.
Connecticut
Governing Law: Connecticut Qualified Disposition Trust Act (CQDTA)
Summary:
- Connecticut Qualified Disposition Trust Act: Established in 2020, this act authorizes the creation of DAPTs in the state.
- Requirements for DAPTs: A DAPT must be irrevocable, provide that the laws of Connecticut govern it, and contain a spendthrift provision. It must be administered by a “qualified trustee” who is a resident of Connecticut or a state or federally chartered bank having a place of business in the state. The trustee may not be the settlor and must maintain some or all of the trust assets and records in Connecticut and materially participate.
- Protection from Creditors: DAPTs provide strong protection from creditors. However, there is generally a four-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to alimony, child support, divorce, or certain tort claims if those claims existed before it was created. It will also not protect against certain tax liabilities.
Delaware
Governing Law: Delaware Code Title 12, § 3570 – 3576
Summary:
- Delaware Code Title 12, Chapter 35: Delaware’s DAPT law came into effect in 1997 under the provisions of this section of the Delaware Code.
- Requirements for DAPTs: A DAPT must be irrevocable; state that Delaware law governs its validity, construction, and administration; contain a spendthrift clause; and appoint a “qualified trustee.” Some exceptions apply to trusts transferred to a Delaware trustee from a non-Delaware trustee. The trustee must be an individual resident in Delaware or a state or federally chartered bank or credit union. The settlor may not serve as the trustee. Some or all of the trust assets must be held in Delaware and the trustee must have the authority to maintain records, preparing or arranging for the preparation of tax returns, or otherwise materially participating in the administration of the trust.
- Protection from Creditors: DAPTs provide strong protection from creditors. However, there is generally a four-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to alimony, child support, divorce, or certain tort claims if those claims existed before it was created. It will also not protect against certain tax liabilities.
Hawaii
Governing Law: Hawaii Revised Statutes, Chapter 554D
Summary:
- Hawaii Revised Statutes, Chapter 554D: In 2010, Hawaii amended its Uniform Trust Code to authorize the creation of DAPTs.
- Requirements for DAPTs: A DAPT must be irrevocable and incorporate Hawaii law to interpret the validity, construction, and administration of the trust. There must be at least one trustee who is a resident of the state, or a bank or trust company with its principal place of business in the state. The trustee must materially participate in administering the trust. The settlor may not serve as the trustee.
- Protection from Creditors: DAPTs provide strong protection from creditors. However, there is a generally a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to alimony, child support, divorce, and or certain tax liabilities. Certain tort claims are exempted from protection if they existed before the DAPT was formed.
Indiana
Governing Law: Indiana Trust Code, Title 30, Article 4, Chapter 8
Summary:
- Indiana Code Title 30, Article 4: In 2019, Indiana amended its Trust Code to authorize the creation of DAPTs, which it refers to as “Legacy Trusts.”
- Requirements for DAPTs: A DAPT must be irrevocable, exist in written form, be signed by the settlor, be designated as a “Legacy Trust,” and state that it is governed by Indiana law. The trust must have a qualified trustee who is an Indiana resident or a state or federally chartered bank or credit union. The settlor may not serve as trustee.
- Protection from Creditors: DAPTs provide strong protection from creditors. However, there is generally a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to child support. It will also not protect assets from division in a divorce if the trust was settled after the marriage began or in certain cases, within 30 days of the marriage. It will also not protect against certain tax liabilities.
Michigan
Governing Law: Michigan Qualified Dispositions in Trust Act
Summary:
- Michigan Qualified Dispositions in Trust Act: In 2017, Michigan amended its laws to authorize the creation of DAPTs under Chapter 700 of the Michigan Compiled Laws.
- Requirements for DAPTs: A DAPT must be irrevocable; state that Michigan law governs its validity, construction, and administration; and contain a spendthrift clause. The trustee must be an individual resident in Michigan, or a bank or trust company authorized to conduct trust business in the state. Some or all of the trust assets must be held in custody in Michigan, and part of the trust administration must occur in-state.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to child support or certain tax liabilities. No protection exists for property division in divorce if assets were transferred to the DAPT less than 31 days prior to the marriage without consent of the other spouse.
Mississippi
Governing Law: Mississippi Qualified Disposition in Trust Act § 91-9-701
Summary:
- Mississippi Qualified Disposition in Trust Act: In 2017, Mississippi enacted this law to authorize DAPTs.
- Requirements for DAPTs: The trust instrument must be irrevocable; state that is governed by Mississippi law; and contain a spendthrift clause. The trustee must be an individual resident in Mississippi or a bank or trust company authorized to conduct trust business in the state. At least some of the trust’s assets must be held in Mississippi. The trustee must also materially participate in the administration of the trust.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to child support or certain tax liabilities. In addition, there is no protection from alimony claims or division of property in a divorce if the ex-spouse was married to the settlor on or before the date assets were transferred to the trust. Some preexisting tort claims are also excluded.
Missouri
Governing Law: Missouri Revised Statute, Title 31, § 456.5.501 – 508
Summary:
- Missouri Asset Protection Trust Act: Enacted in 2004, this act authorizes the creation of DAPTs within the state.
- Requirements for DAPTs: The trust instrument must be irrevocable; contain a spendthrift clause; have beneficiaries other than the settlor; and the settlor’s interest must be discretionary. The trustee must be an individual resident in Missouri or have its principal place of business in the state and at least some of the trust’s administration must occur in-state.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a four-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to alimony or child support, subject to the equitable interests of other permissible distributees. Certain tax claims are also exempt from protection.
Nevada
Governing Law: Nevada Revised Statutes, Chapter 166
Summary:
- Nevada Revised Statutes, Chapter 166: The Nevada DAPT legislation, which came into effect in 1999, is found within the section of the Nevada Revised Statutes governing spendthrift trusts.
- Requirements for DAPTs: The trust instrument must be irrevocable and at least some of the trust’s property and administration must be in Nevada. If the settlor is not domiciled in Nevada, the trust instrument must appoint Nevada trustee. Any distributions to the settlor must be approved by someone other than the settlor. The trustee must be a Nevada resident individual or a trust company or bank with offices in Nevada. The trustee’s powers must include maintaining records, preparing income tax return, and at least some of the trust’s administration must occur in-state. In some circumstances, a family trust company may serve as trustee.
- Protection from Creditors: A DAPT provides strong protection from creditors, including existing creditors. However, there is generally a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: There are no exceptions to protection for child support, alimony, division of property in divorce, or tort claims. However, a DAPT does not protect assets from certain tax liabilities.
New Hampshire
Governing Law: New Hampshire Trust Code, Chapter 564-B
Summary:
- New Hampshire Trust Code: In 2017, New Hampshire authorized the creation of DAPTs with amendments to its laws regulating spendthrift and discretionary trusts.
- Requirements for DAPTs: The trust instrument must be irrevocable; contain a spendthrift clause; and stipulate that New Hampshire laws govern the trust’s validity, interpretation, or administration. There are no restrictions on who can serve as a trustee.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a four-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to child support. Claims for “basic alimony” are also exempt from protection. Claims by a former spouse are exempt from protection if the settlor transferred assets to the DAPT less than 30 days before marriage and the future spouse did not consent to the transfer. A DAPT also does not protect assets from certain tax liabilities.
Ohio
Governing Law: Ohio Legacy Trust Act
Summary:
- Ohio Legacy Trust Act: In 2013, Ohio enacted amendments to its Trust Code to authorize the creation of DAPTs, referred to as “Legacy Trusts.”
- Requirements for DAPTs: The trust instrument must be irrevocable; state that Ohio law wholly or partially governs the trust; include a spendthrift clause that includes the interest of the settlor; and appoint at least one “qualified trustee.” The trustee must be an individual resident in Ohio, a bank, or a family trust company. The trustee must also administer at least some of the trust assets within Ohio and materially participate in the administration of the trust.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is an 18-month statute of limitations for creditors to challenge a DAPT, which in some cases can be extended to as long as 3 ½ years.
- Exceptions: A DAPT does not protect assets from claims related to child support or certain tax liabilities. There is also an exception from claims related to alimony or property division in divorce if the ex-spouse was married to the settlor on or before the date of the qualified disposition.
Oklahoma
Governing Law: Oklahoma Family Wealth Preservation Act (Title 31, Sections 10-18)
Summary:
- Oklahoma Statute Title 31: In 2004, Oklahoma amended its creditor exemption laws to authorize the creation of DAPTs.
- Requirements for DAPTs: The trust instrument may be revocable or irrevocable. It must state that the trust is governed by Oklahoma law; have a trustee based in Oklahoma; and have only qualified beneficiaries (the settlor and the settlor’s spouse, ancestors or lineal descendants; or charities or trusts for such beneficiaries). The trustee must be an Oklahoma bank that maintains a trust department, or a trust company based in the state. The trust must be subject to income tax under Oklahoma law and maintain a majority of its assets in the state.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a four-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to child support or certain tax liabilities.
Rhode Island
Governing Law: Qualified Disposition in Trust, General Laws of Rhode Island § 18-9.2
Summary:
- Rhode Island Qualified Dispositions in Trust Act: In 1999, Rhode Island amended its trust laws to authorize the creation of DAPTs.
- Requirements for DAPTs: The trust instrument must be irrevocable; state that it is governed by Rhode Island law; and include a spendthrift clause. The settlor may not serve as trustee. A trustee must be an individual resident in Rhode Island, a corporation supervised by the state Department of Business Regulation, or a federally chartered bank or credit union. The trustee must also materially participate in trust administration. At least some of the trust’s assets must be held in-state.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is a generally a four-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from alimony, child support claims if at the time of transfer a child support order existed. Alimony and divorce claims are not exempt if the ex-spouse was married to the settlor before on or before the date of transfer of assets to the trust. These claims are valid only to the extent of the debt. Certain tax liabilities are also exempted.
South Dakota
Governing Law: South Dakota Qualified Distributions in Trust, Section 55
Summary:
- South Dakota Qualified Distributions in Trust, Section 55: In 2005, South Dakota amended its trust law to authorize the creation of DAPTs.
- Requirements for DAPTs: The trust instrument must be irrevocable; stipulate that it is governed by South Dakota law (unless the trust is being transferred to a South Dakota trustee from a trustee outside the state); contain a spendthrift clause; and have a “qualified person” as a trustee. A qualified trustee is an individual resident in South Dakota, or a trust company or bank doing business in the state.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from child support claims if at the time of transfer a child support order existed. Alimony and divorce claims are not exempt if the ex-spouse was married to the settlor on or before the date of transfer of assets to the trust. These claims are valid only to the extent of the debt at the time of transfer. Certain tax liabilities are also exempted.
Tennessee
Governing Law: Tennessee Investment Services Act 2007
Summary:
- Tennessee Investment Services Act 2007: In 2007, Tennessee amended its revised statutes to authorize the creation of DAPTs.
- Requirements for DAPTs: The trust instrument must be irrevocable; state that it is governed under Tennessee law; contain a spendthrift clause; and appoint at least one “qualified trustee.” A qualified trustee is an individual resident in Tennessee or a state or federally chartered bank or savings & loan institution. Some trust assets must be deposited in Tennessee and the trustee must materially participate in the administration of the trust.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally an 18-month statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related child support or certain tax liabilities. Alimony and divorce claims are not exempted if the ex-spouse was married to the settlor before or on the date of transfer of assets to the DAPT.
Utah
Governing Law: Utah Code Annotated Section 25-6-501-502
Summary:
- Utah Code Annotated Section 25-6-501-502: In 2003, Utah amended its annotated code to authorize the creation of DAPTs.
- Requirements for DAPTs: The trust instrument must be irrevocable; contain a spendthrift clause; and stipulate that the trust is governed by Utah law. At least one trustee must be an individual resident in Utah or a Utah trust company. The settlor may be a be co-trustee but is not permitted to make distribution decisions.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a two-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from certain tax liabilities. In addition, before any distribution is made to the settlor, the trustee must give 30 days’ notice to a “domestic support obligation creditor” who has obtained a child support order, a spousal support order, or an unsatisfied divorce property division claim.
Virginia
Governing Law: Virginia Uniform Trust Code, Article 5
Summary:
- Virginia Uniform Trust Code, Article 5: In 2012, Virginia amended its trust code to authorize the creation of DAPTs.
- Requirements for DAPTs: The trust instrument must be irrevocable; contain a spendthrift provision; and be governed under the laws of Virginia. It must also have at least one beneficiary other than the settlor and at least one “qualified trustees.” The qualified trustee must be an individual residing in Virginia, or a legal entity authorized to engage in trust business in the state. Some portion of the trust property must be kept in Virginia and the trustee must materially participate in the administration of the trust.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is generally a five-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: DAPTs do not protect assets from claims related to child support or liabilities owed to any governmental authority. Claims from a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust are also exempt as are claims that require a beneficiary to reimburse the state for public assistance.
West Virginia
Governing Law: West Virginia Code, Chapter 44
Summary:
- West Virginia Code, Chapter 44D: In 2016, West Virginia amended its Estates and Trusts Code to authorize the creation of DAPTs. Under West Virginia law, the settlor is referred to as the grantor.
- Requirements for DAPTs: The trust must be created during the grantor’s lifetime; be irrevocable; contain a spendthrift provision; and stipulate that it is governed under West Virginia law. At least one beneficiary other than the grantor must be named. The grantor must file a “qualified affidavit” to certify that the transfer of property to the trust will not render the grantor insolvent or defraud any creditor. The trust must have at least one “qualified trustee,” who is either an individual residing in West Virginia or a legal entity authorized to engage in the trust business in the state. Some portion of the trust assets must be maintained in West Virginia and the trustee must materially participate in the administration of the trust.
- Protection from Creditors: A DAPT provides strong protection from creditors. However, there is a generally a four-year statute of limitations for creditors to challenge a DAPT.
- Exceptions: A DAPT does not protect assets from claims related to child support certain tax liabilities, or creditors named in the “qualified affidavit” the grantor must file prior to conveying assets into the entity.
Wyoming
Governing Law: Wyoming Uniform Trust Code, Spendthrift and Discretionary Trusts
Summary:
- Wyoming Qualified Spendthrift Trust Act: In 2007, Wyoming amended its trust statute to authorize the creation of “qualified spendthrift trusts” (QSTs). In 2013, it authorized the creation of “discretionary asset protection trusts” (discretionary APTs). The requirements for each type of trust are somewhat different.
- Requirements for DAPTs: In the case of a QST, the trust instrument must state that it is a QST created and governed under Wyoming law. The trust must be irrevocable and contain a spendthrift clause. At the time of the trust is created, the settlor must have personal liability insurance equal to the lesser of the value of the trust assets, or $1,000,000. The trustee must be an individual resident in Wyoming, or a person authorized by state law to act as a trustee, or a regulated financial institution operating in the state. The trust instrument for a discretionary APT must provide for discretionary distributions of trust income and/or principal to the settlor. The requirements for trustees are the same as for QSTs, except the trustee responsible for making distributions to the settlor cannot be a trust beneficiary, related to the settlor, or subordinate to the settlor. Both types of trusts must have a Wyoming trustee who maintains custody of at least part of the trust’s assets within Wyoming and materially participates in its administration.
- Protection from Creditors: Both a QST and discretionary APT provide strong protection from creditors. However, there is generally a two-year statute of limitations for creditors to challenge a transfer.
- Exceptions: A QST does not protect assets from child support claims or certain tax liabilities. It also does not protect assets from certain claims from financial institutions or for claims related to property transferred to the trust by a settlor who received the property in a fraudulent transfer. A discretionary APT protects assets other than for certain tax liabilities.
Is it right for you?
The answer is — it depends. But generally:
- If you live in a state with a DAPT law, or
- You have property tied to a state with a DAPT law (such as real estate)
… then there’s a good chance this tool can be a part of your wealth protection plan.
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