The Benefits and Limits of Domestic Asset Protection Trusts

Domestic asset protection trusts (DAPTs) are sophisticated legal tools designed to protect an individual’s assets from creditors and potential lawsuits while allowing the individual to retain some benefits of the assets. While traditionally, asset protection trusts were established offshore, DAPTs offer a domestic alternative with certain advantages and limitations.

These are the principal purposes of a domestic asset protection trust:

1. Protection from creditors — Once assets are transferred into a DAPT, they are typically beyond the reach of creditors, as long as the trust is set up in accordance with the laws of the jurisdiction and the transfer is not deemed fraudulent.
2. Estate planning — By transferring assets into a DAPT, an individual can potentially reduce the size of their taxable estate, thereby minimizing estate taxes upon death. This allows for more efficient transfer of wealth to beneficiaries.
3. Privacy —Assets placed in a DAPT are often more private, as trust agreements and the identity of beneficiaries are generally not public record. 

Currently, 17 states have statutes that specifically authorize DAPTs. Arizona is not one of them, but Arizona does allow what are loosely called hybrid DAPTs. A distinguishing characteristic of a hybrid DAPT is that the trust creator (grantor) cannot name himself or herself as a beneficiary. Once assets are placed in the trust, they can only go to designated third parties as beneficiaries. In addition, the trust must be managed by an independent trustee, which means the grantor loses all control of the assets.

DAPTs offer substantial protection but they must be established in good faith. Transfers to a DAPT can be considered fraudulent if done with the intent to hinder, delay or defraud creditors. Courts can look at factors such as the timing of the transfer relative to a pending or anticipated claim, whether the transfer left the grantor insolvent and the grantor’s intent as shown by the totality of circumstances.

For instance, if an individual transfers assets into a DAPT shortly before declaring bankruptcy or while facing a significant lawsuit, creditors might challenge the transfer as fraudulent. The Uniform Fraudulent Transfer Act (UFTA) provides the legal framework for such challenges. If a court deems a transfer fraudulent, it can order the assets to be returned to the grantor’s estate and made available to satisfy creditor claims.

While DAPTs offer significant benefits in terms of asset protection, estate planning and privacy, they come with complexities and risks, particularly regarding fraudulent transfer laws. An experienced asset protection trust attorney can help navigate these challenges and ensure the trust is established correctly.

At Law Offices of Donald W. Hudspeth P.C. in Phoenix, our business attorneys offer a range of asset protection services for Arizona residents. Call us at 866-696-2033 or contact us online to arrange a consultation.