Domestic Asset Protection Trust Experts

What is a domestic asset protection trust?

When a person receives a settlement, inheritance, or other large sum of money, a variety of unexpected future financial issues could put those assets at risk. Divorce, starting a business, or another life event can dissipate the money over time, whereas bankruptcy or another catastrophic loss can be immediately impactful. Both scenarios cause a person to benefit far less from that large lump sum than he or she could have. Establishing a domestic asset protection trust (DAPT) is one way to protect against these risks. A DAPT is an irrevocable trust that offers an opportunity for lifelong planning and financial protection.

Who might set up a domestic asset protection trust?

A domestic asset protection trust is a bank account that no one can access but you. A DAPT should protect your wealth against all sorts of catastrophic financial loss: judgments, creditors, bankruptcy, divorce, business failure, and liability from accidents. It offers peace of mind that an unexpected situation in the future won’t threaten those assets.

A DAPT may be a good choice if you:

  • Have a net worth that exceeds several hundred thousand dollars,
  • Are in a higher risk profile profession,
  • Have assets that may be exposed to lawsuits, or
  • Believe your assets are worth protecting.

Anyone can get a DAPT to protect their assets at any time. For example, this type of trust can be useful in protecting assets for young adults when it’s established in a jurisdiction that favors the protection of trust beneficiaries. A DAPT can protect against most catastrophic losses to which the financially young are particularly vulnerable. When a settlement is meant to cover medical care and other expenses over an injured person’s lifetime, establishing a DAPT safeguards those funds now and in the future. With the right plan and trustee, a DAPT can be especially effective for a parent or spouse caring for a disabled person.

Types of domestic asset protection trusts

There are many options when establishing a domestic asset protection trust, and they vary from state to state. A few examples are below.

Grantor-style DAPT

This type of trust:

  • Is irrevocable.
  • Names you as the grantor (the creator of the trust) and the sole lifetime beneficiary of the trust.
  • Can have contingent beneficiaries. You have the power to appoint the final distribution of the trust’s assets upon your death. Alternatively, there are options if you would like the trust to last longer.
  • Cannot name you as trustee in addition to grantor, but you can serve as the investment trust advisor.
  • Is expressly for your benefit only, provides asset protection, and should not affect your tax situation. Because it would be considered a grantor trust by the IRS, all income and gains of the trust will be reported on your individual income tax return.

A third-party irrevocable trust

This type of trust:

  • Is irrevocable.
  • Names you as the grantor.
  • Names the beneficiaries as your legal spouse and/or children. You can also have contingent beneficiaries, giving you options for determining how the trust should ultimately distribute.
  • Can have a term of your lifetime, or the lifetime of your children, or perpetuity. Allows you to be the trustee, although it is not recommended. You could also named be the investment trust advisor.
  • Could be set up to have, or not have, income tax advantages.

Hybrid DAPT

A hybrid DAPT is a third-party irrevocable trust (see above) that can be turned into a DAPT. A trust protector has the power to later add you or remove you as a beneficiary.

The role of a trust advisor

The trust advisor of a DAPT serves several important roles. Below is a short description of each.

  • Investment advisor: This person directs the trustee as to how to invest the trust’s assets. This advisor oversees the growth and management of the trust assets.
  • Investment manager: The investment trust advisor may hire one or more investment managers to actively manage the investment of the trust’s assets.
  • Distribution committee: The distribution committee direct the trustee regarding discretionary distributions to the beneficiary.
  • Trust protector: This person (or persons) has the overarching power to appoint, remove, and replace the trustee and any of the other trust advisors if necessary.

An entity may also serve in these roles instead of a person, if the entity meets certain requirements under state law.

Domestic asset protection trust states

Fewer than half of the states in the U.S. allow the creation of a DAPT. These states include:

  • Alaska
  • Delaware
  • Hawaii
  • Michigan
  • Mississippi
  • Missouri
  • Nevada
  • New Hampshire
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Dakota
  • Tennessee
  • Utah
  • Virginia
  • West Virginia
  • Wyoming

DAPTs must be created in one of these states using a trustee in that state.

Making informed choices with your money will ensure you get the most from it and that you are receiving necessary protections into the future. To determine if a DAPT or other planning option is the right move for you, speak with one of our experienced planners. That way, when the money arrives, you’ve already got a plan in place that will secure your future.

Domestic asset protection trusts in settlement planning

Settlement is life changing. Developing the most informed plan possible is a critical step to take before the money arrives. To come up with the right plan, a comprehensive settlement planning firm will take a holistic look at a plaintiff’s situation including future costs, needs, and goals, as well as the potential need for wealth management, long-term risk analysis, and financial protection. With a plan in place, a plaintiff can benefit from settlement as much as possible.

If you or someone in your care is approaching settlement, contact Milestone for advice. Making the best choices with your settlement — and receiving much needed asset protection into the future — starts with being as informed as possible.