Domestic Asset Protection Trusts

You might consider a so-called Domestic Asset Protection Trust. What is a Domestic Asset Protection Trust ("DAPT")? A DAPT is a special type of trust established under the laws of one or more states that specifically authorize the use of a DAPT. Currently, Delaware, Alaska, Rhode Island, and most recently New Hampshire (effective January 1, 2009) authorize the use of Domestic Asset Protection Trusts. These DAPTs were encouraged by state legislatures in an attempt to provide investors and business owners the protection of offshore trust planning within the United States in large part to attract businesses and assets to their states. Most state DAPT statutes have several common features and work as follows:

When you establish the trust, also known as a grantor trust, the trustee of the trust must be a trust company licensed to do business in any one of the applicable jurisdictions (Alaska, Delaware, Rhode Island, or New Hampshire) and the document must specifically reference the domestic asset protection statute (also known as the Qualified Dispositions Act). You then transfer assets to the trust to be held by the trustee.

The trust provides that income and/or principal from the trust is payable to you and/or your spouse and issue, but only in the trustee's discretion. You cannot demand distributions of either income or principal. Even though the trustee has the discretion to use the trust money for your benefit, the assets in the trust will not be subject to your creditors. This technique is particularly appropriate for high risk individuals, such as doctors, lawyers, accountants, self-employed, contractors, and those that may have personal liability attributable to their position serving on one or more boards of directors.

It is important that the provisions of the applicable state law be followed since a trust established under a jurisdiction other than one which specifically authorizes the use of a DAPT will not provide similar protection. All states provide protection against spousal claims, except with respect to a spouse to whom the individual was married at the time the trust was established.

If you are concerned about whether the trustee will actually make distributions to you, you are permitted to appoint a "trust protector" and specifically designate the trust protector as the person who directs investments and/or distributions or both. A trust protector is usually a close associate, such as an attorney or your certified public accountant.

For more information about Domestic Asset Protection Trusts, please contact us.