Domestic Asset Protection Trusts: What You Need to Know

A few years ago, Michigan passed an Act in Michigan that authorized the creation, funding and administration of domestic asset protection trusts (DAPTs). This statutory recognition of DAPTs gives Michigan residents a significant new opportunity to protect assets from the claims of third-party creditors.

How a DAPT Can Protect You

Without a DAPT, if you control the use and enjoyment of an asset, that asset is generally subject to the valid claims of your creditors (whether arising under judgments from loans, malpractice, car accidents or otherwise). In other words, if you own it or control it (e.g., through rights under a trust), your creditors can get to it. However, with a properly-drafted and funded DAPT, you can now retain “certain” rights to the assets transferred into the trust, while restricting your creditors’ access to those assets.

The act will benefit anyone who may become liable for a significant debt or claim. While individuals whose lifestyles or careers make them more likely to be sued, such as officers and directors of banks, general partners in real estate deals, and professionals subject to malpractice claims, are prime candidates for APTs, so is any individual who has accumulated substantial wealth, owns a business, or is high profile. We live in a very litigious society. Add to that the ubiquitous presence of contingency fee attorneys willing to take on claims without any out-of-pocket cost to the plaintiff and this creates the perfect environment for an attack on collectible parties. In recognition of these risks, planners need to discuss the act and its opportunities with their clients even if at first blush a client does not seem to be particularly vulnerable.

Why a DAPT is Not Appropriate for Everyone

DAPT’s are irrevocable (meaning you generally cannot terminate or change them), and they significantly restrict the rights that the Settlor (the person creating and funding the trust) can retain. Because of this, and the fact that most of us are not willing to give up significant control over a large portion of our assets, this is unlikely to be useful to everyone. That said, when DAPTs are used under proper circumstances and for their intended purpose, they can provide supplemental protection that will significantly enhance your overall estate plan.

The act can benefit persons planning on marriage but desiring that their premarital wealth not become vulnerable to a divorcing spouse. A Michigan APT can be used with a traditional prenuptial agreement or as a standalone asset protection vehicle. To be protected the transfer to the APT should be made more than 30 days before the marriage. However, if the parties agree in writing that the protections afforded by the act will apply to contributions made within 30 days of the marriage, those contributions (like the ones made more than 30 days before the marriage) (i) will not be considered marital property, (ii) will not be considered part of the beneficiary’s real or personal estate, and (iii) will not be awarded to the trust beneficiary’s spouse in a judgment for annulment of a marriage, divorce, or separate maintenance.