Asset Protection and Trusts

One of the most common myths about trusts that I run into is the myth that trusts equal asset protection.  While some trusts can provide asset protection, a revocable living trust where the Settlor(s) of the Trust are still alive does not provide asset protection.  For a trust to provide asset protection it must be irrevocable.  Currently, most states prohibit you from establishing an irrevocable trust for your benefit that purports to protect the trust assets from your creditors.  However, there is a growing trend among the states to allow these types of trusts, often referred to as Domestic Asset Protection Trusts or DAPTs for short.With a DAPT, you irrevocably transfer assets to the trust and name yourself as a beneficiary to receive distributions within the discretion of an independent trustee. You may, retain certain rights, including the right to remove and replace the trustee with certain restrictions.  The DAPT laws vary from state to state and, therefore, there may be advantages to selecting one state's laws over another in your particular circumstances.  Some of the more popular jurisdictions for forming a DAPT are Alaska, Delaware, Nevada and Wyoming. Fortunately, you can elect to have your trust governed by a particular state's statute as long as you meet the requirements of that statute, which typically include that the trust assets be located within that state and managed by a local trustee.As with any asset protection strategy no one can guarantee success and as always the best time to plan is now.  DAPTs are only effective for future creditors, as the fraudulent transfer laws of all states prohibit transfers to avoid existing creditors. Also, the trust must be in existence for at least 10 years to protect you against creditors in bankruptcy.  While no asset protection strategy is foolproof, proper use of DAPTs in conjunction with other legitimate asset protection strategies increases your chance of protecting your hard earned assets in our increasingly litigious society.