There are many different types of trusts, but the ultimate goal of any trust is to protect assets for a third-party beneficiary. Many people will use trusts to protect assets from creditors or from being passed down to loved ones. However, what if you want to protect assets and still have the ability to access them? This is where a Domestic Asset Protection Trust (DAPT) can help. This type of trust isn’t right for everyone, but for some individuals, a DAPT can provide a unique opportunity. So, is a Domestic Asset Protection Trust right for you? Learn more below.
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What is a Domestic Asset Protection Trust?
A Domestic Asset Protection Trust (DAPT) is slightly different than most other types of trusts. With most irrevocable trusts, the beneficiary must be a third person. For example, if you want to leave money to a grandchild that will be used exclusively to help cover education expenses, you could fund an irrevocable trust that the grandchild is the beneficiary of. You can prevent anyone outside of the family from having the ability to access those funds, such as a creditor, and you can also protect misuse from other family members, such as the child’s parents. This allows you to rest easy knowing the funds will be used by the person you want, in the way you want. What makes a DAPT unique, though, is that you can both create and be a beneficiary of this kind of trust.
Purpose of a DAPT
The purpose of a DAPT is to protect your assets while still allowing you to have access to them. With a traditional irrevocable trust, once you create it, you no longer have the ability to access the funds. With a DAPT, you still can.
This creates some unique opportunities. For example, if you have assets that you fear creditors may go after, you could put them in a trust. Normally, you would no longer have access to these funds. But when put into a DAPT, you can access these funds if you need them to live off of. When used strategically, this can be a fantastic tax planning strategy as well as an effective estate planning tool.
States that Allow DAPTs
The biggest issue with a DAPT is that only thirteen states currently allow for their creation. These states include:
- Alaska
- Delaware
- Hawaii
- Michigan
- Mississippi
- Missouri
- Nevada
- New Hampshire
- Ohio
- Oklahoma
- Rhode Island
- South Dakota
- Tennessee
- Utah
- Virginia
- West Virginia
- Wyoming
If you are a resident of any of these states, you have the ability to create a DAPT. If you do not live in one of these states, uncertainty still exists around whether you can or cannot create this kind of trust.
In theory, you could create a DAPT in a state where you are not a resident of if you have a trustee in a state where it is allowed. This trustee can be an institution, but that doesn’t mean that the institution would have to manage the trust. Most DAPTs are directed trusts, which means that whoever is designated to manage the trust handles the investment management. So, an institution can be the trustee, while a financial advisor is still in control of managing the assets in the trust. A legal precedent has not yet been set one way or another, and only time will tell what that precedent becomes.
Is a Domestic Asset Protection Trust Right for You?
When used correctly, a DAPT can help lessen the burden of planning and estate taxes, shelter your assets, and keep them readily available should you need to access them. If you live in a state where the creation of DAPTs are allowed, a DAPT could be a great opportunity. If you do not live in one of these states, you may still have the ability to create a DAPT by having a trustee in one of the states that does allow it.
Due to all these considerations, creating a DAPT can be quite complex. Also, all ramifications on taxes, growth, and future transfer to others should be considered before transferring any assets into a DAPT. Work with a financial advisor with experience in DAPTs to learn more and if you could potentially benefit from creating one.
Work with a Financial Advisor
If you’re looking for further assistance or more detailed advice, consider working with a professional from Good Life Financial Advisors. Our team looks forward to serving you!
Disclosure
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.