For most high net worth individuals, the main estate planning vehicle for an efficient transfer of wealth upon death is through use of a revocable trust. However, although efficient from a wealth transfer and disability planning perspective, a revocable trust does not afford any asset protection to the grantor.
Asset protection during a grantor’s lifetime is often accomplished through complex entity structures (multi-member LLC’s or LLLPs) or through irrevocable trusts. However, clients are often apprehensive to transfer too much wealth to an irrevocable trust since they lose all benefit to the transferred assets, and the transfer will most likely require a gift tax return and result in a reduction the grantor’s estate tax exemption amount.
However, there is a type of irrevocable trust that 1) protects the assets during the lifetime of the grantor; 2) provides for the efficient transfer of wealth; and 3) permits the grantor to be an active beneficiary. This specific estate planning technique is through the use of a Domestic Asset Protection Trust (DAPT).
A DAPT is an irrevocable trust established under the laws of one of the limited number of jurisdictions that permit a grantor of a trust to be a discretionary beneficiary and still protect the trust assets from the grantor’s creditors. We generally recommend the formation of a DAPT pursuant to Nevada law since it offers enhanced privacy and it is the only state that does not have any special classes of creditors that can pierce through a DAPT.
Once executed, all assets can be assigned to the DAPT, including financial accounts, real property, interests in closely held businesses, etc. Additionally, all future accounts should be titled in the name of the trust. However, it is important to note that the Trustee of the trust must be a resident (individual or corporation), of the trust’s jurisdiction.
Please do not hesitate to contact Morris Law Group if you believe that a DAPT will better accomplish your combined estate planning and asset protection goals.