20 May Protect Your Assets With a ‘Hybrid’ DAPT
One benefit of the current federal gift and estate tax exemption amount ($11.7 million in 2021) is that it allows most people to focus their estate planning efforts on asset protection and other wealth preservation strategies, rather than tax reduction. (Although, be aware that President Biden has indicated that he would like to roll back the exemption to $3.5 million for estate taxes. He proposes to exempt $1 million for the gift tax and impose a top estate tax rate of 45 percent. Of course, any proposals would have to be passed in Congress).
If you are currently more concerned about personal liability, you might consider an asset protection trust to shield your hard-earned wealth against frivolous creditors’ claims and lawsuits. Foreign asset protection trusts offer the greatest protection, although they can be complex and expensive. Another option is to establish a domestic asset protection trust (DAPT).
DAPT vs. Hybrid DAPT
The benefit of a standard DAPT is that it offers creditor protection even if you are a beneficiary of the trust. But there also is some risk involved: Although many experts believe they will hold up in court, DAPTs have not been the subject of a great deal of litigation, so there is some uncertainty over their ability to repel creditors’ claims.
A ‘hybrid’ DAPT offers the best of both worlds. Initially, you are not named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds in the future, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.
Before you consider a hybrid DAPT, determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children, or other family members, either outright or in a trust, without retaining any control. If the transfer is not designed to defraud known creditors, your creditors will not be able to reach the assets. In addition, even though you have given up control, you will have indirect access to the assets through your spouse or children (provided your relationship with them remains strong).
If, however, you want to retain access to the assets later in life, without relying on your spouse or children, a DAPT may be the answer.
Setting Up a Hybrid DAPT
A hybrid DAPT is initially created as a third-party trust — that is, it benefits your spouse and children or other family members, but not you. Because you are not named as a beneficiary, the trust is not a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.
There is little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the previously discussed risks.
If you have additional questions regarding a DAPT, a hybrid DAPT, or other asset protection strategies, please do not hesitate to contact us