Why the Domestic Asset Protection Trust Fails For Asset Protection

The Domestic Asset Protection Trust (“DAPT”) is an irrevocable trust that allows the settler (or creator) of a trust to be a discretionary beneficiary. While this trust has some advantages, it should not be used for Asset Protection as recent litigation has highlighted concerns about the Domestic Asset Protection Trust, as it is often an inadequate entity to protect assets.

The Domestic Asset Protection Trust is often referred to as a “self-settled trust” because the settlor is one of the beneficiaries. Self-settled trusts allow the trustee to have discretion of whether to make distributions to the settlor, while simultaneously protecting the assets from the settler’s creditors.

The main advantage of The Domestic Asset Protection Trust is that it protects the assets of the settler from their creditors.

The major disadvantages of using the Domestic Asset Protection Trust as a personal asset protector are as follows:

• You are more susceptible to litigation on your trust (fraudulent transfer claim) with the Domestic Asset Protection Trust.
• The Domestic Asset Protection Trust is only valid if the settlor and beneficiaries as well as the trust assets are all in the DAPT state.
• Only twelve jurisdictions recognize the Domestic Asset Protection Trust – so there is little uniformity across the United States.
• Domestic Asset Protection Trust statutes may not protect the settler against judgments in federal courts or by federal administrative agencies.
• The Domestic Asset Protection Trust generally has a longer statute of limitations for creditors to sue on than most other Asset Protection tools.

As an alternative, the limited liability company (LLC) and limited partnership (LP) are far more adequate entities for Asset Protection planning.

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