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:
- New Hampshire
- Rhode Island
- South Dakota
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).Read More