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The DAPT, or Domestic Asset Protection Trust, is becoming a popular alternative to storing funds that are not immediately needed somewhere outside the home country. But while 16 U.S. states now permit the formation of DAPTs, their purpose and administration is still not well understood.

In this article, we outline what constitutes a Domestic Asset Protection Trust, the basics to set one up, and how to decide if this is a type of vehicle that can help you meet your asset management goals.

DAPT Defined

According to the American Bar Association (ABA), a DAPT is a type of holding fund that meets these criteria:

– It is irrevocable, once established.

– It includes the creator as a beneficiary of the trust.

– It can potentially protect at-risk assets from future creditors.

– It includes a spendthrift clause to guard against unapproved or frivolous asset disbursal.

Because establishing a DAPT is not yet permissible in all states, it is sometimes possible to live in one state, and establish a DAPT in another state that does allow it. But here, the protection a DAPT can offer from creditors may be less than if the DAPT was established in the same state as the creator’s residence.

Why Create a DAPT?

Each person’s reasons for establishing a DAPT can be different. In general, DAPT may be suggested as one potential asset management structure for clients who have sizable net worth.

In addition, when a client is contemplating a major life change, such as starting a business, getting married or having children, establishing a DAPT can be a smart choice to shield potentially vulnerable funds dedicated to those goals from creditors.

What is the Goal of a DAPT?

A DAPT’s ultimate goal is to make it difficult for creditors to gain access a debtor’s to at-risk assets as part of a judgment or settlement.

For example, say you decided to start a business, but an unforeseen economic downturn caused you to experience a loss and close down the company. In the meantime, you put a percentage of your liquid income into a DAPT. Your creditors are, of course, eager to get paid. But it is quite difficult to gain access to the funds sequestered in the DAPT.

For this reason, your creditors decide to settle for a percentage of what you owe them back via other means, such as business insurance. Your DAPT assets remain safe inside the protection of the trust.

DAPTs Are Not Foolproof

Because only some states permit the creation of DAPTs, and that number is growing slowly, establishing a DAPT does not offer an ironclad protection against claims from creditors.

If the DAPT is not set up with rigorous attention to protocol by a Roseville CA estate planning lawyer, established in the same state where you reside, or are relied upon too greatly to shield at-risk funds, the court may rule to release those funds to creditors. For instance, if you declare bankruptcy, it is unlikely a DAPT will protect your funds from the demands of creditors clamoring to get paid.

But under certain conditions, establishing a Domestic Asset Protection Trust can be a very effective means of shielding at-risk funds from future creditor demands, and thus safeguarding those funds for you and your family’s sole use. By choosing a reputable legal professional to help you set up your DAPT and following all legal trust requirements to the letter, you may discover that a DAPT is the perfect means of rendering your assets untouchable (or much less accessible) to creditors.

Thanks to our friends and contributors from Meyer & Yee, LLP for their insight into domestic asset protection trust.