Domestic Asset Protection Trusts & Economic Uncertainty: What You Need to Know

In 2016, West Virginia became the sixteenth American state to legalize “domestic asset protection trusts” (DAPTs), a legal concept that allows investors to shelter their assets inside a specialized trust fund. This strategy can be extremely effective in terms of wealth and portfolio management — but the laws are complex and require careful evaluation before making a decision.

Asset Protection Planning: an Overview

In general, a trust simply refers to a legal arrangement in which an asset owned by one person (the grantor or trustor) is transferred to another (the trustee) for the benefit of a designated third party (the beneficiary). The trustee may be reimbursed for their services, but does not actually own the property, and is obligated to act in the beneficiary’s best interests.

Although we discussed the practical uses of an asset protection trust in a previous blog, we did not discuss DAPTs specifically.

Domestic Asset Protection Trusts

DAPTs are commonly referred to as “self-settled,” meaning that the grantor and the beneficiary are one and the same. The trustee controls how and when the grantor is able to access their own funds. In practical terms, this presents several advantages. The grantor is separated from legal ownership of their assets, and thus the responsibility for them. Since the distribution of these assets is entirely up to the trustee, they have the flexibility to deny creditors, former spouses and other claimants’ access.

However, a DAPT cannot be created with property that is currently under dispute: it must be set up before any problems arise.

Domestic Asset Protection Trusts and Global Uncertainty

With a shaky global economy further destabilized by Britain’s departure from the European Union (commonly known as “Brexit”), US financial regulators are likely to increase focus on keeping American funds inside of American borders. This means that offshore trusts will become less viable as a wealth protection strategy, making DAPTs an appealing proposition. Their legalization has risen steadily over the past twenty years, with Delaware and Alaska starting the trend in 1996 and Mississippi and West Virginia joining most recently.

State-by-State Regulations for Asset Protection Trusts

While the general purpose of asset protection trusts remains the same everywhere, states have dramatically different regulations on their functionality. Nevada, for example, is a generally “debtor-friendly” area that prevents trust-protected assets from access by former spouses seeking alimony or child support. In other areas, these claims are sufficient reason to pierce a DAPT without the trustee or grantor’s consent.

Asset Protection Planning with Cohen & Burnett

Cohen & Burnett has provided estate planning and administration, asset protection planning, and trustee and executor services in Washington, D.C. for over 25 years. To explore your options with our trusted legal professionals, visit our homepage or contact us today.

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