No one heading down the aisle thinks that their marriage will end in a divorce. Talking about how they will divide their assets in a prenuptial agreement can be an embarrassing and awkward conversation. So what should one do if they want to protect their assets and avoid the prenup conversation?
For many a Domestic Asset Protection Trust or DAPT may provide an answer.
A domestic asset protection trust is an advanced asset protection strategy that many wealthy individuals and families are using to shield their assets from creditors, and it turns out, it can also be a good vehicle to protect assets in a divorce.
How Does a DAPT Work?
Unlike a traditional revocable living trust that many people have, a DAPT is an irrevocable trust. This is important because a creditor can come after any assets that you have control over. A revocable living trust, by design, is one in which you have control over the assets. You can terminate the trust, withdraw funds and amend the terms. Irrevocable trusts, on the other hand, force you to relinquish any right to the assets and have no control over them. Since you don’t have control and can’t withdraw the assets, your creditors can’t either. Traditionally the problem with irrevocable trusts has been that no one wants to give up control of their assets. What if there was a way for you to put assets into an irrevocable trust but still be a beneficiary of the assets? And what if your creditors still couldn’t access the assets? This is where the domestic asset protection trust comes in. It allows the trust creator to be a discretionary beneficiary, and yet the trust assets are still protected from the creator’s/beneficiary’s creditors.
This is possible because a handful of states (currently 15) have specifically allowed this structure (even if you don’t live in one of the states you can still take advantage of their laws). One of the better states to consider is Nevada because they allow no “exception creditors.” In the other states, they allow some certain creditors to attach your assets – the states block most creditors but allow a few exceptions to gain access to your assets. For example, a state may block all creditors but not spouses. Having your trust and assets in this state would shield you from attachment in a lawsuit, but not in a divorce. This is why the Nevada Asset Protection Trust (NAPT) has grown in popularity for protecting assets in a divorce.
However, not all assets are appropriate for a DAPT/NAPT – especially if you do not live in the state in which you have the trust. For example, real assets such as a house in California may not be a good choice since the asset itself is in California and not Nevada. Better assets to transfer into a Domestic Asset Protection Trust or Nevada Asset Protection Trust would be cash, stocks, bonds, mutual funds and other non-real assets that can be held in Nevada.
If you’re willing to have the prenup conversation, you can couple a Nevada Asset Protection Trust with a prenup to provide greater protection of the assets you bring into the marriage as well as the assets and income you make while married. The combination of these two can provide excellent protection.
To better explore the use of Domestic Asset Protection Trusts and Nevada Asset Protection Trusts, contact our office.