Domestic Asset Protection Trusts (DAPT)

Domestic Asset Protection Trusts (DAPT)

Under the common-law rule against self-settled trusts, an individual traditionally could not create a self-settled trust (that is, an irrevocable trust from which he or she could benefit) and protect trust assets from claims of creditors. With the passage of the Qualified Dispositions in Trust Act, Michigan now authorizes the creation of DAPTs to do exactly that.

The Act allows a person to create an irrevocable trust, retain an interest in that trust, and keep his her future creditors from getting to the assets of the trust. DAPTs do not protect assets from all creditors. Under the Uniform Fraudulent Transfer Act, a transfer to a DAPT is fraudulent and can be set aside if the disposition was made with actual intent to hinder, delay, or defraud any creditor of the debtor. In addition, the assets in a DAPT are not protected in a divorce action if the assets were transferred to the trust 30 days or less before the marriage. DAPT laws have been enacted in a 17 states including Michigan.

To obtain protection under the new law, the trustee of the DAPT cannot be the grantor, the grantor’s spouse, father, mother, children, brother or sister, an employee of the grantor, or a corporation controlled by the grantor. Thus, the trustee of the typical DAPT is a corporate trustee or trusted friend.

The grantor can reserve the following rights in a DAPT:

  • The right to receive discretionary distributions of income and/or principal from the trust
  • The power to directinvestment decisions;
  • The power to veto a distribution from the trust
  • A special power of appointment under a will or other written instrument effective on the transferor’s death; and
  • The right to remove a trustee or an advisor and to appoint a new trustee or advisor

If properly established and funded, the Act provides that the transferor’s creditors may not reach assets transferred to the trust upon expiration of a two-year period beginning with the date the assets are transferred to the trust except in certain instances of fraudulent concealment. For bankruptcy, a longer statute of limitation may apply.

The most likely candidates for a DAPT trust are high net worth individuals in high liability fields. DAPTs may also be used as an alternate to a prenuptial agreement where the new spouse will not agree to enter into a prenuptial agreement.

This Newsletter is considered general information and is not intended to constitute individual legal advice. Please contact us if you think the information herein impacts you directly. We look forward to speaking with you soon.