The Domestic Asset Protection Trust may be Your most Effective Asset Protection

The Domestic Asset Protection Trust may be Your most Effective Asset Protection

The Domestic Asset Protection Trust is the most cutting edge and most affordable asset protection tool in America today. However, they aren’t statutorily recognized in each state, and because of this one has to be careful when and how to use this specialized trust.

They are most commonly known as the DAPT and act as a type of trust that can give you significant asset protection in any type of lawsuit. They were created as one of the best ways to protect a personal residence from creditors, particularly in a situation where there is a great deal of equity in the home.

The Basics

The DAPT is a self-settled trust in which an independent trustee controls and/or distributes trust assets to the beneficiaries.  This allows the person who created the trust (known as the “settlor” or “trustor”), to reap the dual benefits of: (1) asset protection from outside creditors; and (2) the beneficial use of the assets of the trust.

We’ve all heard the phrase “you can’t have your cake and eat it too.” Right? It means you can’t have it both ways, or have the best of both worlds.

Well, the beauty of the DAPT is that practically speaking you don’t have to give up use of the asset or the control to sell and buy a new home, don’t have to file a separate tax return, but get asset protection wherein the home is protected from a lawsuit…that sounds a whole lot like having your cake and eating it too!

In the states with DAPT statutes, an irrevocable trust is created very affordably, a trustee is appointed for a reasonable annual fee and you, the settlor, gets to dictate how the assets of the trust are held, sold and invested. Yes, there are ‘strings’ and ‘provisions’ that limit the control, hence providing the arms length asset protection, but the DAPT is actually quite flexible.

Which states have the DAPT law?

The Domestic Asset Protection Trust is currently recognized in 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.

Traditionally, the states regarded as having the strongest DAPT statutes have been Nevada, South Dakota, Alaska, and Delaware.  However, Utah enacted a new, and very robust, DAPT statute in 2013. Since then we have been creating DAPT’s under the Utah statute.

When drafted carefully and executed correctly, the Utah DAPT provides at least some of the following benefits:

  • Assets placed in the trust are protected against future creditors immediately. Nevada’s statute doesn’t begin protecting assets against future creditors until the assets have been in the trust for two years.
  • Assets placed in the trust are protected against existing creditors after two years, which is similar to Nevada. However, that statute of limitations is reduced to 120 by sending notice of the DAPT to creditors you are aware of, and by publishing notice of the DAPT for creditors you are not aware of.
  • There are no blanket exceptions for child support, alimony, or preexisting torts.
  • Placing your personal residence in the DAPT does not hinder your use of the “sale of home exemption” to avoid paying taxes on any gain when you sell that residence, as long as the trust is drafted as a “grantor” trust.

What if I don’t live in a DAPT state?

The real question is where the asset is, not where you live. The goal of the DAPT is to protected the ‘asset’ from your liabilities, not to protect ‘you’ (there are other asset protection strategies for that scenario- see articles below).

Obviously, the most resilient and effective DAPT holding an asset is in a state where both the DAPT is statutorily authorized AND the asset resides. For example, a Wyoming cabin in a Wyoming DAPT.

Some professionals argue the DAPT is useless if not authorized and established in the state where the asset is. Lawyers on the other end of the spectrum will use a well designed DAPT and hold assets in any state and promise they are bullet proof. The truth always lies somewhere in the middle when the standard legal answer is: ‘it depends’.

Thus, most lawyers in the middle, will concede that creditors seeking to enforce a judgment against a DAPT-owned asset located in non-DAPT state will likely have to incur the time, headache, and expense of litigation in order to unwind the DAPT structure and collect such assets. They may very well eventually be successful in doing so, but that extra time and cost involved can give you a leg up in negotiating a possible settlement.

The moral of the story is that if the equity is enough, a DAPT can’t hurt and the cost-benefit analysis is worth calculating.

Using a DAPT as an overall well designed plan

I have always argued that there never was or will be a “Silver Bullet” when it comes to asset protection (watch out for the Nevada corporate set-up scam), but that good or quality asset protection is the implementation of a comprehensive structural design of multiple strategies depending on how many assets we’re trying to protect. The ultimate goal in asset protection being to minimize the occurrence of a lawsuit and possible losses when a lawsuit does occur. We call this the “multiple barrier approach.” A DAPT can be a perfect “extra barrier” in this approach, and part of a well-designed overall plan.

In my book “The Tax and Legal Playbook” I included several chapters on asset protection, including the benefit of enhancing a plan with privacy protection; two very different strategies but coupled together providing phenomenal protection. I also wrote the articles “Ways to Protected Your Business and Wealth: “The Truth about Protecting Our Assets- Part I” and “Ways to Protected Your Business and Wealth: The Truth about Protecting Our Assets- Part II” that can provide helpful guidance on a whole array of asset protection strategies.

In the end, another way of looking at this is that for many Americans with equity in their home, stocks and mutual fund investments in a brokerage account, or even cash just sitting in the bank, the DAPT could provide an affordable option to the complexity and cost of an offshore trust or business entity.

If you’re feeling a little exposed, and think you might want to take a shot at having your cake and eating it to, please reach out to our lawfirm www.kkoslawyers.com and we can explore your situation in more detail.

[Written in collaboration with Jarom Bergeson, Attorney at KKOS Lawyers working out of the Utah office specializing in asset protection, business planning and tax strategy]

* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.

Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show “Refresh Your Wealth” and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. 

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