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A domestic asset protection trust (DAPT) is a legal entity created to protect assets from creditors trying to get the assets to satisfy a debt. Another name for a DAPT is a self-settled spendthrift trust. A domestic asset protection trust differs from a typical trust because the person creating, controlling, and benefiting from it are generally one and the same. Several countries around the world have laws that allow individuals to create trusts to shield assets. Some U.S. states have decided to enact laws allowing people to create DAPTs in their jurisdiction. It is unclear whether a domestic asset protect trust can shield assets effectively because of conflicting U.S. laws
Ordinarily, a trust involves a settlor, a trustee, and a beneficiary. A settlor is the person who places his assets in the trust, the trustee manages the assets in the trust, and the beneficiary is the person who benefits from the trust. Trust laws control how the trustee manages the assets. A trustee must also follow the instructions that the settlor provides in the document that creates the trust. In contrast, the settlor, the trustee, and the beneficiary are the same person in a domestic asset protection trust.
Some U.S. states have passed laws allowing people to create a domestic asset protection trust within their boundaries. They did this to attract business to their state because many other countries have laws allowing for asset protection trusts. Having the choice to establish a domestic asset protection trust in the U.S. is attractive to people seeking asset protection because the U.S. is seen as a stable country. It is also easier for U.S. citizens to transfer assets to a trust in the U.S. instead of traveling to another country for that purpose.
One potential problem with a domestic asset protection trust is that the U.S. Congress passed a law in the bankruptcy code that sets a 10-year limitations period on assets transferred to a DAPT. In other words, a bankruptcy court has the power to ignore state laws that allow people to transfer assets to that vehicle. For example, if a person places his assets in a DAPT and nine years later declares bankruptcy, the court can still reach the assets placed in the DAPT to satisfy any debts that the person owes. A person should consult a lawyer with experience in setting up a domestic asset protection trust to understand any other potential pitfalls.