While your estate plan may primarily be focused on how your assets are distributed after you pass away, that same plan can help you protect your assets while you are alive. In fact, there are several estate planning tools that can be used to protect assets, including a Domestic Asset Protection Trust (DAPT). To help you better understand, the Los Angeles attorneys at Schomer Estate & Wealth Advisors discuss Domestic Asset Protection Trusts and your California estate plan.
DAPT Basics
A domestic asset-protection trust (DAPT) is an irrevocable self-settled trust established under the special laws of one of the limited number of jurisdictions that allow the Settlor (also referred to as the Grantor or Trustor) to be designated a permissible beneficiary and allowed access to the funds in the trust account. New York is not among the states where a DAPT may be established. A properly drafted and structured DAPT prevents creditors from reaching the trust’s assets. If a DAPT were set up under the laws of a non-DAPT jurisdiction, the general rule is that the settlor’s creditors can access as much of the trust as can be distributed to the trust settlor. In addition to providing asset protection, a DAPT offers other benefits, including state income tax savings when situated in a no-income-tax state.
Does California Allow Domestic Asset Protection Trusts?
California does not authorize the creation of a Domestic Asset Protection Trust (DAPT) under California Probate Code Section 15404, which states that it is against the state’s public policy to recognize DAPTs. Although California does not currently offer statutes to create a DAPT within its own jurisdiction, California residents can still take advantage of DAPTs by setting them up in other states that recognize and support these trusts.
Does a DAPT Protect Assets Immediately?
One reason to discuss the inclusion of a DAPT into your estate plan now is that each DAPT jurisdiction has a statute of limitations period that determines how long is necessary between the date of transfer to the DAPT and the date on which the transferred asset will be protected from the Settlor’s creditors. In fact, if you transfer assets to a DAPT with the intent to defraud existing creditors, those transfers could be deemed fraudulent and voided, making it even more important to establish the trust well before any potential creditor issues arise. The number of years required before the assets are protected varies from state to state. The statute of limitations also differs for preexisting creditors versus non-preexisting creditors. In most jurisdictions, the statute of limitations period tolls for preexisting creditors to protect these creditors.
Does a DAPT Protect Assets from All Creditors?
State laws govern what creditors can reach assets held in a DAPT. With the exception of Nevada, all states that allow DAPTs have “exception creditor” statutes that allow certain classes of creditors to access the trust assets despite the protection offered by a DAPT. Common exception creditors include:
- Fraudulent transfer claims under the Indiana Uniform Fraudulent Transfer Act,
- Child support obligations, and
- Marital obligations incurred in a divorce (when the transfer of assets to the trust occurs after the marriage or within 30 days of the marriage).
Are You Ready to Learn More about Domestic Asset Protection Trusts?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how you might incorporate a DAPT into your California estate plan, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisorsby calling (310) 337-7696 to schedule an appointment.
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