A domestic asset protection trust, or DAPT, is a self-settled spendthrift trust created primarily to protect the grantor’s (i.e., the creator of the trust) or “settlor’s” property from the grantor’s future creditors, while still allowing the grantor to benefit from the trust property. In this scenario, we considering physician malpractice protection. Currently, about 12 states (see below) have adopted laws that specifically permit the formation of a DAPT. DAPT laws vary from state to state, so it’s important to choose a state with the most favorable laws to protect assets in the case of physician malpractice claims.

Domestic Asset Protection Trusts are different from Foreign Asset Protection Trusts or FAPTs in that the former is "locally" established and the latter is governed by a foreign jurisdiction.

States with Domestic Asset Protection Trust statutes:

1. Alaska
2. Colorado
3. Delaware
4. Missouri
5. Nevada
6. New Hampshire
7. Oklahoma
8. Rhode Island
9. South Dakota
10. Tennessee
11. Utah
12. Wyoming

While DAPT laws vary from state to state, DAPT formalities usually require the following: (i) the trust must be irrevocable; (ii) the trust may provide for certain payments of income and principal to the grantor and provide for a spendthrift clause prohibiting payments to the grantor’s creditors; (iii) the grantor cannot serve as the trustee of the trust, but in some states the grantor can serve as an “investment advisor”; (iv) the trust is to be managed by an in-state local trustee; (v) at least part of the administration of the trust must physically occur in the local state; and (vi) the statute of limitations period must expire before the assets contributed to the DAPT become protected from the grantor’s creditors.

Please note the statute of limitations period, which is a period of time that must lapse before the DAPT assets earn protected status from the grantor’s creditors. Currently, Nevada offers the shortest statute of limitations period (two years) and does not give ex-spouses any special rights to reach into the DAPT and take money for alimony, property settlements, or even child support.

Physician malpractice, DAPTS, and taxes

A DAPT can be structured in many different ways depending on the grantor’s income, estate, gift, and generation skipping tax objectives. For example, a DAPT can be structured so that transfers to the DAPT are considered completed gifts so that the future appreciation on the transferred assets is excluded from the grantor’s taxable estate. Alternatively, the DAPT may be structured so that no gift is made upon the transfer of property to the DAPT in order to preserve the grantor's remaining gift tax exemption. In such a situation, the contributed assets to the DAPT will remain included in the grantor's estate for estate and gift tax purposes. Many DAPTs are structured so that the DAFT is considered a grantor trust for income tax purposes (i.e. the grantor pays all of the income tax on the DAPT earnings).

DAPT Concerns:

DAPT statutes are designed to protect the DAPT assets of an in-state resident from an in-state creditor on a non-federal claim such as physician malpractice or the like. However, there is uncertainty as to whether a DAPT statute will protect an out-of-state grantor from an out-of-state malpractice claim due to conflict of laws. There are two constitutional claims that may be raised, permitting creditors to pierce the DAPT and reach in to take DAPT assets: (1) the Full Faith and Credit Clause and (2) the Supremacy Clause. Under the Full Faith and Credit Clause, unless there is a public policy argument for not doing so, states are required to respect the judgments of other states. As an example, if an Illinois court holds that an Illinois creditor can reach into the grantor’s Nevada DAPT, Nevada courts are supposed to respect the holding of the Illinois court.

Bankruptcy courts are federal courts and follow both federal and state bankruptcy laws, depending on where a bankruptcy estate is being administered. So, the concern is that if a bankruptcy court applying both federal and, in our example, Illinois law holds that an Illinois creditor can reach in and seize assets in Nevada, under the Supremacy Clause federal law would trump Nevada’s DAPT statute and the Illinois creditor would be able to seize the Nevada DAPT assets.

Also note, if you create a DAPT and later file for bankruptcy, a federal court can retrieve assets transferred to the DAPT during the previous 10 years (Bankruptcy Code §548(e)(1)), if the actual intent on the creation and transfer to the DAPT was to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

As stated above, as of today, there remains uncertainty as to whether a DAPT will provide a grantor with sufficient physician malpractice protection. Next I will discuss the pros and cons of using a foreign asset protection trust as part of an asset protection strategy for physician malpractice.

More on medical malpractice and asset protection

Next> Foreign Asset Protection Trusts offer an offshore option for protecting your medical practice

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More> Medical Malpractice: Looking at a few strategies to protect your medical practice from claims

More> Understanding voluntary disclosure and offshore bank accounts as you protect your foreign assets

Back> Medical Malpractice Claims: Choosing the right type of business entity can be a crucial first step when designing your asset protection strategy

About the Author: Steven Nofar is licensed in Michigan as an Attorney and Certified Public Accountant.  Mr. Nofar practices primarily in the areas of estate and tax planning, business succession planning, asset protection, charitable gift planning and tax controversies with federal, state and local taxing authorities.  Mr. Nofar’s clients range from small to large business owners and span across the U.S., Europe, Asia, and the Middle East.  If you need additional information or clarification related to this article, please contact Mr. Nofar at 248-335-5000 or at   This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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