Domestic Asset Protection Trusts (DAPTs)
Domestic Asset Protection Trusts (Nevada, Delaware, South Dakota & Alaska Trusts)
Generally, and under the laws of most states, asset protection is not afforded to an individual who places assets in a trust of which he or she is a beneficiary. These trusts are known as “self-settled trusts” or “Domestic Asset Protection Trusts” (DAPT). There are exceptions and a number of states recognize the validity of DAPTs.
DAPTs are irrevocable trusts established under the laws of a jurisdiction that allow the settlor of the trust to be a discretionary beneficiary and still protect the trust assets from the settlor’s creditors.
Statues differ greatly amongst the states, some being much more comprehensive than others. Nevada and South Dakota are generally recognized as allowing debtors the greatest ability to shield assets from the claims of creditors.
Every jurisdiction that recognizes DAPTs has a statute of limitations period that dictates how long is necessary between the date of transfer to the DAPT and the date on which transferred assets will be protected from the settlor’s creditors. The number of years required varies from state to state and differs for preexisting or known creditors versus unknown creditors.
All of the states, except for Nevada, which have enacted legislation allowing DAPTs include provisions in their statutes permitting certain exception creditors to pierce the trust, notwithstanding the fact that the applicable statute of limitations period has already expired. The exception creditor provisions found in every other state generally take the form of carve-outs for property settlements of divorcing spouses, alimony, child support, and preexisting tort creditors.
In addition to already offering a very short statute of limitations and refusing to recognize any exception creditors, Nevada’s DAPT law requires that a creditor must prove “by clear and convincing evidence” that the transfer of property to the DAPT was fraudulent or “violates a legal obligation owed to the creditor under a contract or a valid court order that is legally enforceable by that creditor.”
While a Nevada DAPT must, technically, be irrevocable, Nevada’s asset protection laws permit grantors to retain seemingly broad powers and rights. Nevada law allows the grantor to be the investment trustee, so the grantor can retain all powers to make investment decisions. However, the grantor cannot have any powers to make distributions. Nonetheless, the grantor can retain the power to change the trustees at any time. Thus, there is substantial protection from creditors, but without much sacrifice in control and access to the trust assets.