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.
Even in DAPT states, there is no absolute assurance for asset protection. To discuss DAPTs and asset protection, call Virtus Law today at 612.888.1000 or email us at email@example.com.