When to Use the Domestic Asset Protection Trust (DAPT)?

The Domestic Asset Protection Trust is one of the most cutting-edge asset protection tools to protect your assets from you and your businesses. However, there are not statutorily recognized in every 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 the use of the asset or the control to sell and buy a new home. Moreover, you don’t have to file a separate tax return, but get asset protection for your home 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 18 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Carolina, 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 one of the most robust DAPT statutes in the Country. Since then we have been creating DAPT’s under the Utah statute when possible.

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 can be reduced 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 protect the ‘asset’ from your liabilities, not to protect ‘you’. 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 bulletproof. 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 a 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.

PRO TIP: 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 and 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 is 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 the end, for Americans with equity in their personal home, investments in a brokerage account, cryptocurrency, or even cash sitting in the bank, the DAPT could provide an affordable option to the complexity and cost of an offshore trust or business entity.

For an asset protection consultation and building your own Trifecta, please reach out to our law firm at www.kkoslawyers.com and we can explore your situation in more detail.

* To sign up for Mark’s weekly Free E-Newsletter and receive his Free 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 PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “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”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP.