What Should You Know About Asset Protection Trust
A Domestic Assets Protection Trust (“DAPT”) is an irrevocable trust which is generally formed as a defective grantor trust to benefit the trustor. A properly-structured DAPT shields trust assets from the claims of creditors of the trustor, making it a particularly attractive estate planning tool for business owners or professionals in high-risk occupations, such as executives and medical professionals.
DAPT is a self-settled trust that the trustor is the beneficiary of the trust. In a DAPT, the trustor is responsible for paying taxes on the income the trust generates, and trust assets are excluded from the trustor’s estate. The trust doesn’t allow the beneficiary to assign their interest in the trust to someone else. In other words, it includes a “spendthrift” clause, which allows for asset protection.
What is noteworthy is that the creditor of a DAPT should not be pre-existing and that DAPT needs to be set up at the right time, or it may not be able to provide assets protection. According to Fraudulent Conveyance Law, a transfer will be fraudulent if made with actual intent to hinder, delay, or defraud any creditor who was indebted (Cornell Law School, 2020). For example, an individual establishes a DAPT after he or she has gone into a car crash, to protect assets from potential lawsuits; The transfer may be subject to Fraudulent Conveyance Laws. Many types of assets can be transferred to a DAPT, including cash, securities, real estate, and business interests. However, attorneys generally suggest clients do not put their entire assets into a DAPT.
At present, seventeen states allow for self-settled Domestic Asset Protection Trusts. Those states are Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming (Oshins, 2020). If you are not a resident of one of those seventeen States and you would like to set up a DAPT, a hybrid DAPT is an appropriate consideration. A hybrid DAPT is initially set up as a third-party trust, that is, the beneficiaries of a hybrid DAPT are the trustor’s spouse or children instead of the trustor. In a hybrid DAPT, the trustee or trust protector has the authority to add additional beneficiaries, including the trustor, as a beneficiary in extreme circumstances. Keep in mind that the statute does not require DAPT’s trustor to be a resident of these seventeen States, but the DAPT must have a resident trustee of that State.
To learn more about the Financial Planning Program at California Lutheran University contact Graduate Admission at clugrad@CalLutheran.edu or visit us at https://www.callutheran.edu/academics/graduate/financial-planning/.
Hratch J Karakachian, CPA, ESQ, is a senior adjunct faculty member in California Lutheran University School of Management. He has been teaching in the MBA in Financial Planning Program since 2013. He has taught Principles of Estate Planning, Income Tax and Strategy, Managerial Accounting and Foundations of Accounting and Finance courses.
Dr. Chia-Li Chien is a succession program director at Value Growth Institute, a succession consulting practice dedicated to helping business owners increase the equity value of their firms. Before her private consulting practice, she held several senior management positions in Fortune 500 companies. Dr. Chien is a director of the financial planning program in the School of Management at California Lutheran University. Dr. Chien is a frequent speaker about succession and retirement planning at national conferences and has published three books, including her most recent publication, “Enhancing Retirement Success Rates in the United States.” Dr. Chien serves on the boards of various national financial service associations. She holds a doctorate in financial planning and is a Certified Financial Planner (CFP®) as well as Project Management Professional (PMP®).
Jade Zhang is a graduate student at California Lutheran University expecting to graduate in July 2020. She is studying for a Master of Science in Financial Planning.
Cornell Law School. (2020). 11 U.S. Code § 548.Fraudulent transfers and obligations. Legal Information Institute. Received from: https://www.law.cornell.edu/uscode/text/11/548.
Oshins.com. (2020). States Rankings Charts. Retrieved from: https://www.oshins.com/state-rankings-charts.