Domestic Asset Protections Trusts—Exchanging a Little Control for a Huge Benefit

When a grantor places her assets in trust, she has options as to who the beneficiaries of that trust will be, as well as the amount of control she will retain over those assets. 

In a revocable living trust (the most common type), the grantor serves as the trustee and beneficiary.  It’s as if nothing changed—she still has complete control over the assets.  She may spend them, invest them, or transfer them as she pleases.  The only difference is a technical one: the trust, and not the individual, “owns” the assets, for the benefit of the grantor and subject to the grantor’s control. 

The downside to a grantor retaining such control is that the assets remain subject to the grantor’s creditors.  If the grantor has failed to pay her debts, or if the grantor is sued and loses, these assets held in a revocable trust are still subject to those creditors’ claims.  Historically, “creditors of a grantor who created a trust could reach the assets of the trust to satisfy their claims if the grantor retained the right to benefit from the trust.”[1] 

A Domestic Asset Protection Trust (“DAPT”) is used to protect a grantor’s assets from her creditors.  Before DAPTs, the only way for a grantor to retain control of her assets while protecting them against creditors was to form the trust under foreign law in certain offshore jurisdictions.  But Alaska, then Delaware, then South Dakota and several other states created a statutory block to creditors’ reach—DAPTs, which are now authorized in 17 U.S. states.

A DAPT is an irrevocable trust that still affords a large amount of control to the grantor while allowing the grantor to be a beneficiary of the DAPT.  Specifically, South Dakota statute allows the grantor the following rights of control:

• power to veto distributions;
• powers of appointment that allow the grantor to redirect distributions during life and after death;
• power to make distributions of the trust principal under certain circumstances; and
• power to replace trustees and trust advisors under certain circumstances.[2]

On the beneficiary side, the statute allows the grantor to retain rights to

• trust income generally, and
• distributions of trust principal under certain circumstances.[3]

While DAPTS do not afford grantors the same level of control as that permitted in a revocable living trust, grantors still have significant powers of control and beneficiary rights.  The trade-off is the assets held in the DAPT are off-limits to the grantor’s creditors.  BUT this advantage cannot be enjoyed until the statute of limitations period for creditors bringing claims against the grantor has passed.  Generally, a creditor with a claim against property held in the DAPT must make the claim within two years from the time the grantor transferred that asset to the DAPT, with certain exceptions.

South Dakota’s DAPT statute is consistently rated one of the best and most aggressive statutory schemes in the nation in terms of affording debtors the greatest protection against creditors’ claims.  Stay tuned to Goosmann Law Firm’s Trust Law Counsel blog for more information on DAPTs and other advantages to housing your trusts in South Dakota.  For assistance in utilizing these advantages as part of your comprehensive estate plan, contact a South Dakota estate planning attorney or stop in to our Sioux Falls law firm, Sioux City law firm, or Omaha law firm. For more content like this, visit our Trust Law Counsel blog!

[1] Patrick Goetzinger and Heath R. Oberloh, South Dakota Trust Law: Pulling Back the Curtain—A Soup to Nuts Tour of South Dakota Trust Law, 43^rd Annual Minnesota Probate & Trust Law Section Conference, June 12, 2017 (referencing the Restatement of Trusts (Second), Section 156(2)).

[2] Id. at 10.

[3] S.D.C.L. § 55-16-2(2).