As of October 10, 2020, nineteen states have laws that allow for the creation of a special type of trust called a domestic asset protection trust (“DAPT”). The nineteen states are Alaska, Connecticut, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. There is a bill pending before the Arizona legislature that if passed would cause Arizona to become the eighteenth DAPT state.
A DAPT is an irrevocable trust created in a state that allows a person (the trustmaker) to transfer ownership of the trustmaker’s assets to the trustee of the DAPT for asset protection. The general rule applicable to a DAPT is that the trustmaker’s creditors cannot get the trust’s assets.
Currently Arizona trust law provides that if a person creates a revocable or an irrevocable trust that names the trustmaker as a beneficiary and the trustmaker transfers his or her assets into the trust the assets are not protected from the trustmaker’s creditors. If Arizona adopts the proposed Self-Settled Spendthrift Trust law Arizonans will be able to protect their assets by creating a DAPT and transferring their assets to the trustee of the DAPT.
About Arizona Trusts
Trusts are derived from English trust law that allowed a person, aka the settlor, the trustor, the grantor or a trustmaker, to create a trust that is administered by a person or company called the trustee for the benefit of one or more people, aka a beneficiary or beneficiaries. A common trust is a revocable trust created for estate planning purposes where a person or a married couple creates a trust to own their assets for their benefit and then pass the assets to children or loved ones on the death(s) of the beneficiaries.
Trusts & Creditors of a Beneficiary
Current Arizona law provides that neither revocable trusts nor irrevocable trusts protect the trust’s assets from the trustmaker’s creditors if the trustmaker is a beneficiary. A great asset protection device is an irrevocable trust created by person #1 for the benefit of person #2 and funded with person #1’s assets if the transfer of assets is not a fraudulent transfer or a transfer in fraud of person #1’s creditors.
How Does a DAPT Protect Assets of the Beneficiary?
A DAPT created in state that authorizes DAPTs alters the general rule that an irrevocable trust cannot protect the assets of a beneficiary if the beneficiary created the trust and funded it with the beneficiary’s assets. If Arizona adopts the proposed Self-Settled Spendthrift Trust law the general rule of Arizona law will be repealed and a trustmaker will be able to create an Arizona irrevocable trust that protects the assets of the trustmaker who is a beneficiary if the assets in the trust were transferred by the beneficiary to the trust.
Will a DAPT Always Protect Assets?
An important fact of DAPT law is that a court may or may not prevent the trustmaker’s creditors from getting the assets in the trust that the trustmaker transferred into the trust. Whether a court will uphold or reject asset protection depends on which of the following situations applies to the trustmaker and the creditor:
- The creditor’s claim arises from actions or failure to act in the State of Arizona and the lawsuit is filed in Arizona. If the transfer of assets is not a fraudulent transfer or a transfer in fraud of the beneficiary’s creditor the court should recognize the Arizona DAPT, apply Arizona law to the lawsuit and rule that the creditor cannot get any of the trust’s assets.
- The creditor’s claim arises from actions or failure to act outside Arizona and the lawsuit is not filed in Arizona. We do not know how the non-Arizona court will rule.
