A DAPT is an irrevocable trust that protects assets from creditors and judgments awarded in divorce or civil cases. It’s also an effective tool for reducing state income taxes in some jurisdictions.
DAPTs can hold cash, securities, and real estate. They’re often used for personal assets that carry an inherent risk or business assets.
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Protection from Creditors
A domestic asset protection trust, or DAPT, is a specialized irrevocable trust. Unlike other irrevocable trusts, it allows you to name yourself as a trust beneficiary. This is important because it gives you access to the assets, but creditors cannot recover them.
Typically, these trusts shield assets from creditors by separating the legal right to the property from the beneficial ownership. DAPTs can hold cash, securities, real estate, and other assets. A trustee manages these assets by the settlor’s instructions and distributes them to beneficiaries.
DAPTs also help heirs avoid the lengthy and expensive probate process after your death. This is especially helpful for people who need to qualify for Medicaid government benefits to pay for long-term care in nursing homes or assisted living facilities.
Protection of Non-Marital Assets
Domestic asset protection trusts can protect non-marital assets from creditor claims and offer some protection in the event of a divorce. These trusts are generally irrevocable and separate assets from a person’s gross estate. This protects legal action and can deter potential litigation.
While a DAPT cannot protect assets that are transferred into it after it has been established, it can protect the assets that a person transfers into the trust before knowing that they may be facing legal action. This is because state laws regarding DAPTs have statutes that make it difficult for creditors to argue that the transfer was fraudulent.
A DAPT can also protect non-marital assets if it is established before marriage, which can be much easier than trying to negotiate a prenup.
Protection of Assets in the Event of a Divorce
Many people are concerned about losing assets through a lawsuit or divorce. Even if you don’t have any financial problems, it is still important to protect your assets. One of the best ways to do this is through a domestic asset protection trust (DAPT). Michigan is among the 17 states that allow these specialized irrevocable trusts. This type of trust shields your assets from creditor claims if you have a debt problem. It also makes it more difficult for a court to order the sale of your protected assets to pay your creditors.
A DAPT is an effective way to protect your assets, but knowing the details is important. An estate planning attorney can help you decide whether a DAPT should be part of your financial plan.
A well-structured DAPT shields trust assets from the claim of creditors, making it an attractive tool for professionals in high-risk occupations, such as lawyers and surgeons, who could be the target of malpractice claims. It also provides tax benefits, including saving on state income taxes (though this depends on the jurisdiction and state law).
While DAPTs can be beneficial, there are some caveats. It’s essential to work with an estate planning attorney who understands the intricacies of these trusts and how they work with state laws.
Despite the benefits, it’s important to note that transferring assets into a DAPT does not protect those assets from creditors until the statute of limitations in the state where the trust is established has passed. Furthermore, a trustee of a DAPT must still comply with court orders regarding the assets, and exception creditors can access those assets even after the statute of limitations has passed. However, this protects assets from civil judgments, creditors, and divorce proceedings.