Domestic Asset Protection Trusts

Domestic Asset Protection Trusts are a Powerful Protection Tool

A Domestic Asset Protection Trust (“DAPT”) is a legal structure that Stuart Green Law can help you use to protect your assets from creditor claims and lawsuits. In essence, a DAPT is an irrevocable trust in which the beneficiary can be the same person that created the trust, and the trust’s assets are shielded by that individual’s creditors, including legal complaints, malpractice and negligence claims, divorcing spousal claims, and other legal/financial consequences.

Historically, business owners have only used limited liability companies or corporate entities to protect their business assets. A much stronger option is to use limited liability companies or corporate entities along with a DAPT, which allows individuals to protect their personal assets as well as any business or investment assets. This type of trust can help level the playing field when it comes to personal exposure to creditors and lawsuits.

Domestic Asset Protection Trusts not only protect your financial health when legal action is brought against you, it will help deter lawsuits from being brought against you. Creditors are less likely to pursue a judgment against you if they know it’s legally protected by a DAPT.

DAPT Availability

Domestic Asset Protection Trusts are available only in a handful of states. Similar to Foreign Asset Protection Trusts, Domestic Asset Protection Trusts, DAPTs legally shield assets from third-party liability including divorcing spousal claim and other lawsuits, while permitting settlors to retain some control over the trust assets and enjoy a discretionary benefit during their lifetime.

• A Domestic Asset Protection Trust is fully discretionary. This means that settlors can receive financial benefit from the trust and protect trust assets from creditor claims and lawsuits, while maintaining control over the investment management function through the directed trust structure.
• Not all Domestic Asset Protection Trust statutes are created equally. South Dakota is regularly recognized as the top-tier Domestic Asset Protection Trust jurisdiction, while Delaware, Alaska, and Wyoming are all second-tier jurisdictions.

Domestic and Offshore Protection: South Dakota Provides the Best of Both Worlds

There is an ongoing debate over whether Domestic Asset Protection Trusts or Foreign Asset Protection Trusts are more effective.

South Dakota law renders the debate over. South Dakota Codified Law (SDCL) § 55-3-47 provides a mechanism to have both domestic and offshore asset protection within one trust instrument.

If a judgment is obtained in any action brought against a trustee of a South Dakota trust for payment, where a court of another state declined to apply the law of South Dakota related to the asset protection nature of the trust in determining the validity, construction, or administration of such trust, or the effect of a spendthrift provision, the statute clearly indicates that the trust company has no power or authority under South Dakota law to recognize or pay the judgment.

Under the statute, the trust company is to resign and appoint a successor trust company in accordance with the terms of the trust instrument, and convey the trust property to the successor trustee. Presumably, the judgment obtained would then be returned unsatisfied and the creditor would need to commence the action against the successor trustee.

There is nothing in South Dakota Codified Law (SDCL) § 55-3-47 preventing a South Dakota trust company from transferring the trust and its assets to an offshore successor trust company, properly named in the document, thereby creating an asset protection strategy utilizing both domestic and offshore asset protection in one trust instrument.

Through appropriate planning, the trust assets can be transferred offshore only when needed. Until the offshore asset protection is needed, the trust is administered in South Dakota and assets are held in the U.S. Therefore, the settlor enjoys the “best of both worlds” if the settlor initially chooses a Domestic Asset Protection Trust over a Foreign Asset Protection Trust.

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Domestic Asset Protection Trusts (DAPTs) present a strategic option for securing your assets against legal threats and creditors. At Stuart Green Law, we are adept at employing DAPTs, especially utilizing South Dakota’s superior legal environment, to ensure your financial security. Whether integrating a DAPT into your asset protection strategy or exploring the blend of domestic and offshore trusts, we’re here to assist. Reach out to Stuart Green Law to see how a DAPT can enhance your wealth protection efforts and bring you peace of mind.