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Protect Your Family from Lawsuits with a Domestic Asset Protection Trust

On Behalf of | Jan 9, 2023 | Estate Planning

The Domestic Asset Protection Trust

A domestic asset protection trust (DAPT) is a legal structure into which you (in your role as the grantor) transfer your accounts and/or property. Once transferred into the DAPT, the DAPT may offer protection from future lawsuits, divorcing spouses and creditors. Even though you have transferred these assets to the trust, you can continue to enjoy the benefit of this property in the DAPT, with some limitations.

DAPTs work on the legal principle that someone cannot take away from you something that you no longer own. When you transfer ownership of your property to a DAPT, you are actually making a gift of it to the trustee (the person or entity you have chosen to manage, invest, and use the accounts and property) on behalf of the irrevocable trust. The trustee is then under a legal obligation to use this property for your benefit, or for the benefit of those you have named in the trust.

How a DAPT Works

When you create a DAPT, you sign a trust document and permanently gift some of your property into the trust. The trustee may be able to make distributions to you as the grantor, thereby allowing you to continue enjoying some benefits of the property in the trust.

What Kind of Creditor Protection Does a DAPT Provide?

A DAPT does not protect against certain state and federal claims. It also does not protect against creditor claims that existed at the time the DAPT was funded. Creditors are also precluded from bringing claims against the grantor more than 4 years after the DAPT was funded.

Despite the protection offered by a DAPT, some creditors will be able to reach the property owned by the DAPT. Currently, state law does not allow a DAPT to be used to

  • spend down or qualify a grantor or the grantor’s spouse for Medicaid eligibility;
  • defeat state or federal reimbursement claims or rights of recovery for Medicaid benefits paid to the grantor or the grantor’s spouse; or
  • defeat creditor claims if property is transferred to a DAPT with the intent to prevent, hinder, or delay a known or present creditor from reaching the property.

Who Is Likely to Need a DAPT?

Not everyone will need a DAPT because not all people face the same kinds of risks. However, there are certain professions and circumstances for which you may want to consider using a DAPT as part of your estate planning.

  • High-risk occupations. Lawsuits are increasingly common against those in certain professions, such as doctors, accountants, lawyers, real estate developers, builders, architects, and business executives. Creating a DAPT to protect a portion of your assets can be an effective shield against risks associated with lawsuits if you are in one of these occupations.
  • Owning a business. Owning a business can put you at a higher risk of lawsuits. Using a DAPT can protect your home and other personal property against claims brought against your business. Probate court entirely. This process not only limits court costs but also maintains the privacy of your financial records while enabling your beneficiaries to enjoy the benefits of the trust without disruption or delay.