July 13, 2024

You work hard to earn your money. You save it in accounts, perhaps invest, and secure it in trusts. Naturally, you want to protect it from creditors. A trust in which the creator of the trust is not the beneficiary is protected. However, if you are the beneficiary of the trust, this is called a self-settled trust. These trusts are usually not protected and creditors can access them. However, there are states which allow forming of a Domestic Asset Protection Trust. This type of trust is protected from creditor and domestic claims. 

What Is a Domestic Asset Protection Trust?

The laws of certain jurisdictions allow the establishment of an irrevocable trust in which the settlor can also be a discretionary beneficiary. This is the Domestic Asset Protection Trust and it provides the same protection as a standard trust. The settler maintains access to the funds in the trust while creditors cannot make claims. 

The laws between states that allow DAPTs vary considerably in the amount of protection they offer. South Dakota and Nevada are the two state jurisdictions that provide the greatest amount of protection to settlers of a DAPT. 

Every state has limitations on the protection offered. For example, assets are not protected immediately upon being placed in the trust. There is a waiting period before protection begins. The trust is also not protected against claims made before it was formed. Before forming a DAPT, it’s important to make sure it will be able to serve your intentions for forming it.

What Are the Requirements of a DAPT?

Details of requirements vary by state law but most states require that the settlor be a permanent resident of the state in which the trust is to be created. If the chartered bank or trust company has a place of business in the state, a non-resident can form a DAPT. Thus, people who don’t live in South Dakota or Nevada can still take advantage of the superior protection those states offer by using a trust company operating there.

How Much Control Does the Settlor Have? 

Upon transferring assets to the trust, the settlor relinquishes most of the control over the assets. Again, it varies by state law but the settlor generally maintains veto power over the replacement or removal of trustees and the distribution of assets to beneficiaries. The settlor also has the power to determine how the assets will be allocated upon the settlor’s death.

What Are the Advantages in South Dakota and Nevada?

The states of South Dakota and Nevada offer the greatest protection by law for DAPTs. They also offer broad power to the settlor, such as allowing them to be the investment trustee. This allows the settlor to have full control over all investment decisions concerning the trust. The limitations period after the assets have been placed in the trust is also shorter in these states.

Forming a trust is an excellent way to protect financial assets for the people you intend to have them. If you are one of the beneficiaries, it’s best to form a DAPT to have those assets protected. 

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