Often, clients ask if there is way to shelter their assets from creditors. In Minnesota, the short answer is: no. However, in a handful of states, there is a trust that could allow for someone to shelter their assets from potential creditors – or at least, minimize what the creditors could obtain. While we have had a post on the basics of asset protection, this post will discuss the a trust dedicated to asset protection.
The Details
This trust is called a Domestic Asset Protection Trust (DAPT). First created by statute in 1997 in Alaska, it is a type of irrevocable trust that allows the grantor/settlor of the trust to be a beneficiary of the trust, but allow for protection of the trust assets from the settlor’s creditors. Essentially, the trust has legal title to assets, but the settlor can maintain the beneficial enjoyment of the trust assets.
If such a trust were set up in a non-DAPT state, the general rule is that the settlor’s creditors could access as much of the trust as can be distributed to the trust settlor. However, for DAPTs, most of them contain a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor.
Each DAPT state has a time period that determines how long is required between the date of transfer to the DAPT and the date on which the transferred asset will be protected from the settlor’s creditors. Laws also vary as to how preexisting creditor versus non-preexisting creditors are handled
DAPT States
As mentioned, a limited number of states allow for these types of trusts:
- Alaska
- Colorado
- Delaware
- Hawaii
- Missouri
- Nevada
- New Hampshire
- Ohio
- Oklahoma
- Rhode Island
- South Dakota
- Tennessee
- Utah
- Virginia
- Wyoming
Creditor Exceptions
DAPTs are frequently proscribed or limited in their effects by states and the courts. For example, a DAPT generally has a couple of creditor exceptions in which creditors can get at the trust assets
- when a debtor is the sole beneficiary and the sole trustee of a trust,
- where support payments are ordered (a court may order the trustee to satisfy a beneficiary’s support obligation to a former spouse or minor child), and
- a tort creditor.
Please keep in mind that while DAPTs do exist in certain states, there is no sure fire way to ensure asset protection. For those residents of states that allow DAPTs, be sure to contact an attorney for more specifics and to learn if a DAPT is the right option for you.
