A Domestic Asset Protection Trust (DAPT) is designed to protect assets in the event a person is sued or files for bankruptcy. 11 states have statutes authorizing the use of DAPTs: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
A typical DAPT works as follows:
- You irrevocably transfer assets to the trust and name yourself as a beneficiary. You may name other beneficiaries as well.
- You name an unrelated trustee who is not subordinate to you or a professional trustee.
- At least one of the trustees must be a resident or corporation of the state whose DAPT statute controls the trust.
- The language of the DAPT must state that the trustee has full discretion to make or withhold distributions to you. However, you can replace the trustee if the trustee does not make distributions to you in the manner you wish – which is how as a practical matter you retain some control.
DAPTs are effective only for future creditors, as the fraudulent transfer laws in all states prohibit transfers to avoid existing creditors. See e.g. Uniform Fraudulent Transfer Act § 4(a).
Caveat: A DAPT should provide effective protection to a resident of a state that has enacted a DAPT statute from his or her in-state creditors. The law is still somewhat ambiguous as to how effective a DAPT truly is if you do not live in one of the eleven asset protection states.
Compare P. Spero, Asset Protection: Legal Planning, Strategies and Forms (WG&L) at §6.08 Self-Settled Trusts (taking a more negative position) with T. Flubacher and R. Herndon, “Delaware Asset Protection Trusts and Creditors’ Rights,“ Estate Planning (September 2010), p. 19 (taking a more positive position).