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Domestic Asset Protection Trusts: an uncertain asset protection vehicle

As we have pointed out before on this blog, asset protection planning is a discipline that often goes along with estate planning and which involves a number of techniques that have the goal of protecting one's assets from claims of creditors, though without engaging in concealment or tax evasion. The goals of asset protection often overlap with those of estate planning, and so it is important to consider them together.

Among the various techniques sometimes used in asset protection is the domestic asset protection trust (DAPTs). These trusts are intended to protect one's assets from creditors.

DAPTs shorten the time during which a creditor may challenge a transfer to the trust and it is more difficult for creditors to prove that the transfer was fraudulent. It is questionable, though, at least according to many estate planners, whether DAPTs are a favorable technique in asset protection planning. Here we'll take a brief look at a number of potential problems with these trusts.

Firstly, a DAPT may encounter conflict of laws problems, since each state has its own unique law. Most states prohibit a person from establishing a trust for his or her own benefit to protect against creditors, though a handful of states do allow this. In cases where the parties, the conduct or the assets are from different states, the person who set up a DAPT may end up losing out in the end, as judges in states disallowing such trusts are unlikely to permit their enforcement. There are further complications when a non-DAPT states strikes down the trust. Is it still valid in a state that allows such trusts? The answer is currently unclear.

In some cases, DAPT statues themselves are sources of uncertainty, because of exception to the normal statutory protections. These can end up making the protections useless in many cases. Such exceptions sometimes allow creditors to access the trust money in tort, child support, alimony, tax evasion, and other such claims.

In our next post, we'll continue looking at the topic of Domestic Asset Protection Trusts, particularly why they are limited in their usefulness as vehicles for asset protection.

Source: AdvisorOne, "5 Problems With Domestic Asset Protection Trusts," Michael S. Fischer, March 29, 2012.

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