5 Things You Should Know About Domestic Asset Protection Trusts
Dec 29, 2015 08:52AM ● Published by MED Magazine
By Breandan Donahue
Lawsuits are commonplace these days. You are most likely to be targeted by one if you have wealth or work in a high-risk profession. There are many techniques for protecting your wealth against such risks; for example, maintaining appropriate insurance and structuring assets across several limited liability companies. These are strong strategies, but they do have their gaps and blind spots. Here are five things you should know about Domestic Asset Protection Trusts (DAPTs).
1. Your Wealth Protection Vehicle.
A Domestic Asset Protection Trust, or DAPT, is a wonderful complement to the above approaches and serves as a fantastic wealth protection vehicle. A DAPT is a type of trust a person creates for himself or herself that can protect the assets held in the trust from creditors, but still leave a door open for those assets to support the trust creator. This was not always possible.
Over the last two decades, approximately 15 states have enacted laws that allow an individual to do just that: create a trust, be a beneficiary of that trust, but still wrap the trust in creditor protection. These trusts are known as DAPTs. Fortunately for those of us in this geographic area, of all the states that have DAPT laws, South Dakota is among the best in its features and protections.
2. The South Dakota Advantage.
There are certain requirements that need to be met in order to take advantage of South Dakota’s DAPT laws. First, the grantor of the trust (the one creating it) cannot be trustee of the trust. Second, the trust needs to be housed in South Dakota and be governed by at least one trustee that is located there as well. Third, the trust must be unchangeable. In short, a grantor must be comfortable relinquishing a large measure of control over the assets. This seeming inconvenience is more than offset by the substantial protection and safety net the trust creates.
3. Who Are DAPTs For?
DAPTs are great for those people that find themselves in one or more of the following categories: business owners or executives, high-liability professions such as medicine, and those with high-net worth. Those with the most to lose and that, for reasons of their positions or professions, are lucrative targets for lawsuits and claims.
4. Don’t Put All Your Eggs In One Basket.
The asset types that are typically placed in DAPTs are stocks, bonds, cash accounts, mutual funds, closely held business interests, and occasionally real estate. When placing property into the trust, it is important to understand that for a DAPT to be effective, it cannot become the house for all of your assets. You can fund the trust with significant assets, but you cannot go so far as to impoverish yourself. DAPTS are just one part of a larger overall asset protection strategy. It is a fine line that needs to be walked very carefully, but do it correctly and it will create a creditor “lockbox” over a sizeable portion of your assets.
5. Now, Not Later.
DAPTs are proactive measures. A DAPT must be done long before there is a need for one. If you wait to form one until there is a problem or even just the hint of a lawsuit, then you’ve waited too long. Every DAPT state has a curing or ripening period before the asset protection becomes effective as to future creditors. After the property is placed in the trust, the countdown begins. In South Dakota, this window of time is 2 years. It varies in other states. The practical byproduct of this is that if you want to take advantage of this type of trust, you must act sooner rather than later.
If you are in a high-risk profession, and want to take advantage of a DAPT, it is critically important to get started today. Talk to an estate planning attorney to help you take the proper proactive measures toward your wealth protection. Don’t wait until it’s too late.
Breandan Donahue is an Estate Planning Attorney at Goosmann Law Firm.