Asset insurance is an important part of your financial security, but it’s a good idea to protect your assets as well. By creating a solid estate plan that shields your investment portfolio and assets, you can keep your financial situation stable and continue to grow your wealth. Most self-directed trusts don’t give you the asset protection you may need if you’re the beneficiary, but some states understand the need for asset protection through trusts. In these states, you can form what’s known as a domestic asset protection trust (DAPT).

A DAPT lets you be a permissible beneficiary of the trust, meaning you retain access to your assets while shielding them from creditors. You may not have to live in one of the states that offers DAPTs to form one, but it’s always best to consult a financial advisor to ensure you’re getting the asset protection you require.

Key Takeaways:

• DAPTs are only available in some states and can provide asset protection while keeping your asset accessible.
• Nevada asset protection trusts (NAPTs) offer some of the best asset protection thanks to their added benefits for investors.
• DAPTs and NAPTs provide a level of asset protection with many benefits over standard trusts.
• There are some downsides to protecting your assets through a DAPT or NAPT.
• You can’t form a DAPT in every state, but 20 states offer varying levels of asset protection through DAPTs.

What Is a DAPT?

A DAPT allows you to create a trust and name yourself as the settlor of the account, which means you choose how to handle assets in the trust. A DAPT is an irrevocable self-settled trust that provides protection from creditors who may come after your assets. By forming a DAPT for your assets, you have control and access to the asset, but it’s inaccessible to creditors. There are provisions for DAPTs in certain states that allow some creditors to obtain access to your DAPT, but the protection makes it more challenging and time consuming.

Although this type of trust protects your primary residence, you can add other assets, such as cash, securities, limited liability companies (LLCs), real estate, intellectual property, and recreational equipment, to a DAPT. To determine whether a DAPT is your best option, you should establish goals for protecting your assets from creditors and forming an estate plan that ensures your beneficiaries get the assets you want them to have.

What Is a NAPT?

A NAPT is an asset protection trust formed in Nevada, supplying some of the best protection out of all the states that offer DAPTs. In other states, you don’t get asset protection when you first fund your DAPT, but in Nevada, your protection begins within two years of creating and funding the NAPT. Nevada also has no exceptions for the creditors who can access your NAPT, giving you an added layer of protection over DAPTs in other states that allow certain creditors access to your DAPT.

Additionally, creditors must prove you fraudulently funded a DAPT to avoid contractual or judgment liability if they want to access it for debts or lawsuits owed. Nevada also gives you broader powers to make investment decisions for your trust than other states. While you can’t make distribution decisions as the settlor for your NAPT, you can change trustees whenever you like, so if there’s a disagreement about distributions, you can choose new trustees whose ideals better align with your own.

What Are the Benefits of a DAPT or NAPT?

Protecting your assets with a DAPT or NAPT provides many advantages, but whether this type of asset protection is right for you will depend on your investment strategy and the security you need. As each estate plan is unique, you should speak to an advisor who understands your financial situation and goals to help you determine the best way to protect yourself and your wealth. 

It’s also important to speak with someone familiar with DAPTs in the state where you want to form one because the regulations vary among them. Depending on the state, these are some of the benefits DAPTs offer:

Tax Exclusions and Savings

When you file taxes, the IRS typically doesn’t require you to include DAPTs in your federal estate taxes. This ultimately helps eliminate or significantly lower death taxes because the trust isn’t included in the gross estate. Establishing your DAPT in a state with no income tax can help shield you from paying income tax if you live in a state that taxes income.

No Limitations on DAPT Holdings and Transfers

You can hold any asset in a DAPT, allowing you to shield anything you want with this type of asset protection. While DAPTs commonly protect securities, you can put a wide range of assets into the trust fund. Because you can appoint yourself as the grantor and the beneficiary, you’ll have access to all the assets in the trust, although most states prevent you from unilaterally controlling the trust.

Privacy From Creditors

The main reason to establish a DAPT is to provide an added layer of protection to prevent creditors from taking your assets. If a creditor sues you when you have your LLC in a DAPT, they won’t be able to seize your business or assets. While they can still sue you, the assets in the DAPT can’t be used as part of a court settlement against you. This isn’t foolproof, but the obstacle that DAPTs provide can deter creditors.

Available to Nonresidents

Most states will allow nonresidents to form DAPTs, but some rules apply. For instance, you’ll probably need to appoint a trustee or co-trustee living in the state. In some cases, lawyers may fight to access assets in a DAPT in another state. For example, if you have real estate in Arkansas in a NAPT, there could be a conflict of interest, and your assets may need more security. Consult an advisor to ensure you have the proper protection for your situation.

What Are the Downsides of a DAPT or NAPT?

Although establishing a DAPT or NAPT has many benefits regarding asset protection, there are some downsides that you should consider:

Limitations Period

The limitations period is the amount of time your assets must be in a DAPT before you can benefit from its protection. In Nevada, the limitations period is two years, one of the shortest of all states that allow DAPTs. This period can vary in other states but is usually about five years. This means that creditors can pursue any assets you include in a DAPT if they do so before the limitations period is up.

Provisions

All states have provisions for DAPTs prohibiting the trustee or grantor from providing distributions from the trust if the trustee, grantor, and beneficiary are all the same person. So if you maintain full control over how the assets are spent and divided, you can’t also distribute anything from the trust. This also means that the co-trustee in charge of distributions can’t pay out anything they suspect could later be taken by a creditor.

In-State Trustee

Most states require a DAPT to have a trustee residing within the state. This trustee oversees record keeping, record maintenance, and tax return preparations. In some states, the trustee can be a corporation, but special rules may apply. Choose a trustee company with experience and knowledge of the DAPT laws in the state where you want to create one.

Which States Allow DAPT?

The list of states allowing DAPTs is growing, but it’s vital to know their differences to understand what this added layer of asset protection means in every state you plan to fund a DAPT. The 20 states currently allowing DAPTs are:

• Alabama
• Alaska
• Connecticut
• Delaware
• Hawaii
• Indiana
• Michigan
• Mississippi
• Nevada
• New Hampshire
• Ohio
• Oklahoma
• Rhode Island
• South Dakota
• Tennessee
• Utah
• Virginia
• West Virginia
• Wyoming 

Remember, you don’t have to live in one of these states to protect your assets there. Including DAPTs as part of your overall investment strategy can help you keep your hard-earned wealth away from creditors.

Anderson Advisors Can Help With DAPT and NAPT Planning

Anderson Advisors can help with all your financial planning needs. Our team of experts has worked with thousands of clients to tailor an investment strategy to their specific needs and goals, and we’d love to do the same for you. Our team can help you set up a DAPT to give you the benefits of this layer of asset protection well before you need it. Contact us for a consultation today.