Domestic Asset Protection Trusts (DAPTs)

Domestic Asset Protection Trusts (DAPTs)

DAPTs have a strong appeal to clients concerned about future claims. But, these powerful trusts also offer a wide range of other benefits, including: insuring privacy, easing the fear of a future financial reversal, tax savings, flexibility to modify the trust if circumstances change and avoidance of intra-family quarrels.

The most significant feature of DAPTs is that they are irrevocable. But, most forms of irrevocable trust provide asset protection. The distinction is that other types mandate that the client permanently lose use and control of the assets transferred into the trust. Most clients view this as an unacceptable result. The solution is to create a DAPT in one of the leading states allowing such trusts, armed with two core provisions: (1) the trustee’s distributions are “discretionary,” and (2) the client is designated as a permissible trust beneficiary. The desired outcome is that creditors will have greater difficulty seizing the assets, while the client will have access to the assets in an emergency.

Seventeen states have passed laws enabling DAPTs. However, residents of those states not yet allowing DAPTs (e.g., Georgia) may still enjoy their benefits by establishing a DAPT in one of the states that has enacted a DAPT statute. The legal sustainability of properly structured and implemented out-of-state DAPTs is still untested in court; however, a preponderance of the evidence and commentary point toward their survival. See Tom Greene’s article in Trusts & Estates for a detailed discussion of DAPT law pertaining to legal challenges to out-of- state residents. When appropriate, it is clear DAPTs are more prudent than taking no action at all. And, from a practical viewpoint, a DAPT will have proven its worth if it provides real benefits to the client and either (1) is upheld, or (2) if a dispute arises, leads to an attractive settlement.

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Liberty Street Advisory Group refers to the separate entities, Liberty Street Law, Liberty Street Capital and Trust & Estate Stewards. None of these entities or persons furnish actuarial, accounting or comprehensive tax advice. Liberty Street Law is a law firm, and does not provide investment management, or any financially-related services. Liberty Street Capital, is a limited liability company registered as an investment advisor in Georgia and other locations. Trust & Estate Stewards is a limited liability company. Past results are not a guarantee of future performance.