While Minnesota has generous opportunities to shield assets from creditors, it has yet to enact the equivalent of an offshore trust. However, there are a group of states that have enacted the Domestic Asset Protection Trust (DAPT) which permits one to shelter (or minimize what can be obtained) assets from potential creditors.
The DAPT is a type of irrevocable trust where the grantor/settlor of the trust is the beneficiary of the trust, providing protection of the trust assets from the settlor’s creditors. Thus, the trust itself has legal title to the assets; however, the grantor/settlor can enjoy the rewards of the trust assets.
If a DAPT-like trust were set up in a non-DAPT state, the basic rule is that the settlor’s creditors could access as much of the trust that can be dispersed to the trust settlor. Most DAPTs, however, contain a spendthrift clause which prohibits a trust beneficiary from alienating a projected interest, in favor of a creditor.
According to Thomas Fafinski, one of the founders of Virtus Law, a DAPT:
• Must be irrevocable or unchangeable;
• Should appoint a trustee with the discretion to administer the trust;
• Must appoint a corporate or individual trustee that is a resident of the jurisdiction where the trust is formed; and
• Should contain a “spendthrift” clause, which restricts the transferability of a beneficiary’s interests in the trust property—whether voluntary or involuntary—before the trustee actually distributes the property to the beneficiary.
The DAPT states are: Alaska, Colorado, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, and Wyoming.
No DAPT has been examined through the courts as of yet. For residents of DAPT states a properly created DAPT will function if questioned. For residents of non-DAPT states, there is still a concern that it will in fact protect a plaintiff’s assets if the case doesn’t settle and proceeds through the court process.
Important to keep in mind that DAPTs usually have a few creditor exceptions where creditors can reach the trust assets, such as:
• when a debtor is the sole beneficiary, as well as the sole trustee of a trust;
• where support payments (spousal or child support) are ordered; and
• when a tort creditor is involved.