Arizona Domestic Asset Protection Trusts

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If you have substantial financial assets or a high profile and worry about protecting your wealth from creditors or legal claims, you may have several legal options for shielding your assets from claims or losses. These options include setting up a domestic asset protection trust (DAPT), a specific type of trust designed to protect assets from legal claims.

Domestic asset protection trusts can also help individuals pass on their wealth to heirs and beneficiaries with minimal tax burdens and without spending considerable time and money on probate. However, establishing an effective domestic asset protection trust involves a complex process. It can be beneficial to work with a knowledgeable estate planning attorney to understand your legal options and ensure you have an enforceable DAPT.

We at Pennington Law, PLLC, work hard to provide tailored estate planning solutions to individuals and families in West Valley and throughout Arizona. Our attorneys want to help you secure your wealth and empower you to transfer your hard-earned assets at the appropriate time with minimal expense and effort.

Our dedication to excellent client service has earned our attorneys and our firm numerous awards, including Best Attorneys of America, Lawyers of Distinction, Elite Lawyers, and Best Probate Attorneys in Surprise, Peoria, and Goodyear. Our founding attorney, Andre L. Pennington, was an attorney in the U.S. Air Force, where he had invaluable training and experience in estate planning for servicemembers. As a veteran, Pennington knows the value of doing one’s duty and gives his total effort to obtain favorable client outcomes.

domestic asset protection trust Arizona Contact Pennington Law, PLLC, today for a free initial case evaluation to learn more about Arizona domestic asset protection trusts. Our firm will take the time to understand your situation and needs and recommend estate planning tools that can help you protect your wealth and interests. Reach out to us today to speak with an experienced estate planning lawyer about the suitability of a DAPT for your goals.

Domestic Asset Protection Trust Key Terms

Key terms associated with domestic asset protection trusts include:

Irrevocable Trust – An irrevocable trust refers to a type of trust where the trustmaker cannot alter the terms of the trust or terminate the trust without the consent of the trustee or the trust’s beneficiaries. By placing assets in an irrevocable trust, the trustmaker gives up all ownership rights. Transferring assets to a trust removes them from the trustmaker’s probate estate and protects them from taxes and creditors.

Grantor – Another term used to refer to a trustmaker. The grantor establishes the trust by signing the trust document and legally transferring their assets to the trust.

Trustee – The trustee manages the assets in the trust according to the terms of the trust document. A trust document may instruct a trustee on how to manage the trust assets or give the trustee broad discretion.

Beneficiary – A beneficiary receives distributions of income and assets from the trust according to the trust document’s terms. Depending on those terms, a beneficiary may have the right to demand an accounting from the trustee or to remove and replace the trustee.

Creditor – A creditor has the right to collect money from a person due to some legal or contractual obligation that person has. Common examples of creditors include credit card companies, loan issuers, medical providers, utility companies, and individuals or entities that hold a money judgment.

What Are the Pros and Cons of a DAPT?

Some of the pros of setting up a DAPT include the following:

Asset Protection – A DAPT can preclude creditors or claimants from executing in-state or foreign judgments against the assets held in the DAPT. Furthermore, a DAPT can protect non-exempt assets from liquidation if you need to declare bankruptcy.
Asset Exclusion – A DAPT can be used to expressly exclude assets you owned before marriage from the marital estate in case you get divorced.
Control Over Assets – You can retain some control over the assets in a DAPT. For example, you can receive income from the trust or be a beneficiary.
Safeguarding Assets – A DAPT allows you to safeguard assets for your heirs or beneficiaries to pass on without the need for probate.

However, DAPTs also have some limitations or drawbacks, including the following:

Due to the irrevocable nature of a DAPT, you cannot withdraw the assets you’ve placed in trust. You can only receive distributions of those assets at the trustee’s discretion.
You cannot use a DAPT to defeat known claims, as establishing a DAPT after receiving notice of a claim may constitute a fraudulent transfer.
DAPTs have specific requirements and can prove more complicated to establish than other estate planning or asset protection tools.

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How Does a DAPT Work?

A DAPT can protect a trustmaker’s assets from creditors when the trustmaker places their assets into an irrevocable trust. Irrevocable trusts can provide you with greater protection than a revocable trust. Whereas a trustmaker retains the ability to alter or terminate a revocable trust, the trustmaker or beneficiaries cannot amend or terminate an irrevocable trust without the trustee’s consent.

The trustee is a third party who manages the assets transferred to the DAPT according to the trust document’s terms. Depending on the trustmaker’s goals, they may give themselves the right in the trust document to receive distributions from the trust at the trustee’s discretion.

What Is a Domestic Asset Protection Trust?

A domestic asset protection trust (DAPT) refers to a type of trust formed under state laws that protect the trustmaker’s assets from creditors or claimants. With a trust, the trustmaker creates a legal entity that holds assets for the benefit of beneficiaries.

When the trustmaker puts assets in the trust, the trust becomes the legal owner, so creditors or claimants usually cannot reach those assets once placed in the trust. However, current Arizona law carves out an exception to this rule, allowing the trustmaker’s creditors to reach any assets placed into the trust. But the state Legislature has a bill under consideration to authorize “self-settled spendthrift trusts,” allowing Arizonans to create legal structures that effectively work just like a DAPT.

Today, 17 states in the United States recognize DAPTs:

Alaska
Delaware
Hawaii
Michigan
Mississippi
Missouri
Nevada
New Hampshire
Ohio

Oklahoma
Rhode Island
South Dakota
Tennessee
Utah
Virginia
West Virginia
Wyoming

If an Arizonan owns property in a state that recognizes DAPTs, they can create a DAPT in that state to protect their assets there.

DAPTs differ from traditional estate planning trusts, which often aim to transfer or allocate assets from one person to another. DAPTs focus on protecting the trustmaker’s assets from others.

When Is the Best Situation to Use a Domestic Asset Protection Trust?

A domestic asset protection trust can best protect someone with significant assets who is more likely to be a target of creditors or lawsuits. These include professionals in high-risk professions, such as doctors, business owners, executives, or owners of real estate portfolios. DAPTs work well for licensed professionals such as physicians, lawyers, accountants, or architects, as a corporation or LLC cannot protect professionals from malpractice claims. Although malpractice insurance can help financially protect licensed professionals, they remain liable for any claims or judgments not covered by insurance.

What Are the Drafting Requirements for a DAPT?

A trustmaker should work with an experienced attorney to draft a DAPT that is valid under state law. The trustee of the DAPT must be a qualified third-party not related to the trustmaker. The trustmaker can be a beneficiary of the DAPT, but they must also name at least one other beneficiary. The rights and distributions of the beneficiaries must be clearly defined in the trust document.

The trustmaker will then transfer to the DAPT any assets they want to protect. Remember that the trust should be funded with assets that are not subject to existing claims or potential creditors.

Each state that recognizes DAPTs may have specific drafting requirements for setting up a trust. For this reason, it’s essential to work with an experienced West Valley Arizona estate planning lawyer to ensure you properly set up your DAPT and that it meets all statutory requirements.

What Is the Waiting Period for Assets to Begin Being Protected?

A DAPT goes into effect once the trustmaker signs the trust document and transfers ownership of assets to the trust. Transferring assets may involve:

Signing a title or deed over to the trust
Changing beneficiary designations
Moving funds from one bank account to the trust’s bank account

However, trustmakers must remember that they cannot use DAPTs to avoid the claims of a specific creditor. Once a trustmaker has notice of a claim or potential claim, they cannot shield assets with a DAPT. Creditors can still reach any assets transferred to a DAPT after a trustmaker has notice of a claim. Therefore, trustmakers should set up a DAPT before any event that may give rise to a legal or financial claim, such as:

Accumulating debt
Filing for divorce
Filing for bankruptcy
Committing a tort or breach of contract

Contact a West Valley, Arizona Domestic Asset Protection Trust Lawyer Today

Do you have questions about DAPTs and whether they can help you achieve your estate planning goals? Then contact Pennington Law, PLLC, today for a free, no-obligation consultation with an Arizona domestic asset protection trust lawyer. Turn to our firm for help protecting the assets and the wealth you’ve worked hard to achieve.

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