Attorney Robert Moshman wrote an article that gives an overview of a relatively new type of trust called a “Domestic Asset Protection Trust” or DAPT.  The article is about Nevada’s new law that authorizes the creation of a Nevada based-trust called the “Nevada Asset Protection Trust (NAPT).” Several states including, Alaska, Delaware and Wyoming have passed DAPT statutes.

The DAPT is a special type of irrevocable (not amendable) trust the purpose of which is to protect the assets of the trust creator (also know as the “settlor”).  Until recently, the laws of all fifty states did not allow people to avoid paying their creditors by creating a trust for their benefit and transferring ownership of their assets to the trust.  There is a sound economic principle behind this rule, i.e., commerce would cease to exist as we know it if a person could borrow money, put it in a DAPT and then avoid paying the creditor.

The DAPT and the NAPT sounds good on paper, but to date there have not been any appellate level cases that have respected the DAPTs when the DAPT is formed in one state, owns property in a different state and the lawsuit is filed.

Jay Adkinson, a nationally known asset protection lawyer, is not a fan of this type of trust.  See Jay’s article called “Analysis of Domestic Asset Protection Trusts a/k/a ‘Alaska Trust’ or ‘Nevada Trust’ or ‘Delaware Trusts'” and “Domestic Asset Protection Trusts.”  At the beginning of each of his articles, Jay has the following text in red:

Domestic Asset Protection Trusts Neutered by Bankruptcy Reform

The 2005 changes to the Bankruptcy Code have created a new 10-year limitations period for transfers to self-settled trusts which are meant to hinder, delay or defraud creditors. This effectively means that all transfers to domestic asset protection trusts will be suspect for the 10 years prior to the date that a bankruptcy petition is filed. Because of this, domestic asset protection trusts should not be considered for asset protection planning and, indeed, in most circumstances it might be malpractice per se for an advisor to form a DAPT for his client if asset protection is a concern.