What is a Domestic Asset Protection Trust?

Asset protection is growing for wealthy families and the DAP is a useful tool.

Created originally by attorneys in Alaska and Delaware in 1997, there are now 17 states, including the newest addition to the DAP club, Michigan, that permit wealthy families to use a Domestic Asset Protection Trust to shield assets from creditors. The trusts are growing in popularity, but not without controversy.

Forbes’ article, “Michigan Debuts The Latest State Asset Protection Trust,” says the use of a domestic asset protection trust is a common strategy for anyone needing sophisticated estate planning.

Many people set them up with 10 or 20% of their total assets, thinking of it as a rainy-day fund for added peace of mind. But in addition to asset protection, trusts can also help save on estate taxes and move wealth from one generation to the next.

When you transfer assets into a trust for the benefit of others (like your children) and yourself, if there’s a judgment against you, the trust’s independent trustee won’t use trust assets to pay your debt. In Michigan, creditors have two years to go after DAPT assets, which is the same as in Nevada and South Dakota. However, in Delaware and Alaska, creditors have four years. Michigan lets a divorcing spouse access assets that are transferred to the trust less than 30 days before marriage—similar to Alaska. Nevada, on the other hand, doesn’t give ex-spouses owed alimony, property settlements or child support beyond its two-year statute of limitations. Michigan has an exception for child support, like most states.

The laws in each state that permit the use of DAPs vary widely, so you will need to check with an estate planning attorney to learn if your state permits the use of a DAP and what its rules are.

Reference: Forbes (February 10, 2017) “Michigan Debuts The Latest State Asset Protection Trust”