6 Insights into Domestic Asset Protection Trusts
Protect your wealth against lawsuits while potentially drawing income
When a high-net-worth individual has substantial assets and wants to shield some or all of them from potential creditors, a domestic asset protection trust may be a solution to consider. While DAPTs can protect your assets against lawsuits for decades, their complex rules can make it challenging to understand how they work, how they can be leveraged and who should use them.
"A DAPT can be a powerful estate planning tool for the right client," says Tim Powers, national director of fiduciary governance at Fifth Third Bank. "However, there are many nuances in DAPT drafting, and it takes a knowledgeable advisor to navigate the process."
The DAPT trustee has full discretion in distributing funds from the DAPT. "This is why it is critical for DAPT grantors to work with a trustee such as a bank that has the experience, management ability and judgment that is best for your situation," says Powers.
When determining whether a DAPT is a good fit for your financial circumstances, consider some of the pros and cons of the trust. Bear in mind that each individual is unique and should consult with their attorney and tax advisors before committing to any trust approach.
What is a Domestic Asset Protection Trust?
A Domestic Asset Protection Trust (DAPT) is a self-settled trust, meaning the person who establishes the trust (i.e., the grantor) can also be a discretionary beneficiary, usually under a discretionary standard, during their lifetime. This could mean, for example, receiving distributions of income from investments at the trustee’s discretion.
Unlike a revocable trust, a DAPT is an irrevocable trust, which means that it cannot be changed or revoked by the grantor and access to the principal and income are controlled by an independent trustee. A close family member or business associate cannot be named trustee and instructed on how to manage the assets and distribute income and principal. In some states, the trustee may also engage another advisor to help manage specialized assets, such as a closely held business.
"The grantor first needs to be clear about what they want to accomplish and then work with an advisor to determine if a DAPT is the right vehicle," Powers says. "If asset protection is not a primary goal, other options may be more suitable."
Because Domestic Asset Protection Trusts are self-settled trusts, they generally have "spendthrift" provisions preventing the beneficiary from transferring, assigning or selling the assets to someone else. These provisions, along with the beneficiary’s lack of control over the trust assets and compliance with all statutory requirements, can protect the assets from being seized in a lawsuit.
Not every state offers DAPTs, but the grantor does not need to reside in the state where the trust is set up. Twenty states currently allow DAPTs, and Fifth Third accepts trusteeship of DAPTs in Ohio. A resident of Florida could set up a DAPT with Fifth Third in Ohio, for example, potentially shielding their assets from creditors in Florida and elsewhere.
DAPT asset protection considerations
"Since DAPT assets are owned by the trust, creditors and courts generally cannot make successful claims against them," Powers says. "This protection applies to all beneficiaries of the trust, such as the grantor’s children." A son’s interest in a DAPT, for example, may not be considered a marital asset in a divorce settlement.
The protection is not universal, however, and varies by the statutes and case law of the state in which the trust is established. In some states, for instance, DAPT assets can be taken for unpaid child support. There is usually a waiting period (such as two years after trust creation) before the assets are deemed completely shielded from claims, meaning that DAPTs cannot be used to protect assets in current litigation. Creditors can challenge the transfer of assets to a DAPT for up to four years in some states and up to two years in others.
Who should consider a DAPT?
DAPTs are often used by people in professions at high risk of litigation, such as doctors, lawyers and business owners. They offer the potential for more complete creditor protection than a limited liability company or a limited liability partnership. In some states, for example, a negligence lawsuit can pierce the LLC protection. DAPTs also can be used to protect assets against claims made in divorce proceedings. A DAPT can also help reduce taxes on the grantor’s estate.
Because of the high cost of establishing and maintaining a DAPT, these trusts typically work best for clients whose net worth is above $10 million, even if the DAPT represents only a small portion of their estate.
What kind of assets can be placed in a DAPT?
A DAPT can be funded with many types of assets, from equities and fixed income to real estate and closely held business interests. These assets must be chosen carefully so that the trust cannot be successfully challenged. For example, conveying assets to a DAPT can be deemed "voidable" if the assets were being moved to protect them from a pending bankruptcy or to artificially create insolvency. Additionally, assets cannot be moved to a DAPT to protect them from known creditors.
Where should a DAPT be maintained?
The rules for DAPTs are determined by the state in which they are created. Some states require some of the assets to be held in the state. In most cases, the trustee (or at least one co-trustee) needs to be a resident in that state. Many trust companies have established offices in DAPT-granting states for this purpose. Some states have a law against perpetuity, which sets a time limit on a DAPT. Delaware, for example, limits DAPTs to 110 years.
Individuals considering a DAPT should consult with an experienced estate planning attorney who is knowledgeable about DAPTs, to determine whether this kind of trust makes sense for them and, if so, which DAPT states are the best match for their circumstances and needs.
Estate planning and tax considerations
If a DAPT is properly structured, the assets placed in it may no longer be considered part of the grantor’s estate, potentially reducing the federal estate tax liability. Any completed gifts to the DAPT would utilize a commensurate portion of the grantor’s lifetime gift and estate tax exclusion ($13.99 million in 2025), and appropriate federal gift tax returns would need to be filed for this transaction.
In addition to the federal estate tax exemption, grantors may be able to reduce state estate tax liability by establishing the DAPT in a state with a higher exclusion or no state-level estate tax. In Massachusetts, for example, the estate tax exclusion is $2 million for an individual and $4 million for a couple, but in many of the states that have DAPT statutes, there is no estate tax. These include Alaska, Delaware and Ohio.
Even when appropriately structured from a legal standpoint, a grantor who establishes a DAPT to exclude assets from estate tax liability must be prepared to combat the presumption of an implied agreement between the grantor and the trustee. An implied agreement is a strong indication that the grantor did not relinquish control of trust assets, and as a result, these assets could be included in the grantor’s taxable estate.
Ways to rebut this kind of implied agreement include: (1) ensuring that the grantor retains sufficient liquidity in the grantor’s estate after funding the DAPT so the grantor never needs distributions from the DAPT for spending needs; (2) naming a third-party trustee who is not under the control of the grantor, whether familial or professional; (3) not taking regular distributions from the DAPT; and (4) disclaiming any rights as a beneficiary.
For high-net-worth families, a DAPT can help preserve and protect assets while providing lifetime income for beneficiaries, including the grantor. Establishing a DAPT can also reduce the size of the grantor’s estate and shift assets to low-tax states. While there are several important trade-offs to consider, a well-crafted DAPT can be a helpful addition to your estate planning tool kit.
For more information on whether a DAPT is right for your estate plan, contact your Fifth Third Private Bank advisor.