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Delaware Court Upholds Self-Settled Asset Protection Trust Decision

Self-settled asset protection trust safeguards affirmed by Delaware Court in CES 2007 Trust, rendering it a significant method for shielding your assets.

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Shield your wealth from potential lawsuits by setting up a self- administration trust for asset...
Shield your wealth from potential lawsuits by setting up a self- administration trust for asset protection.

Setting Sail on a Safe Shore: Navigating the Benefits of a DAPT

Delaware Court Upholds Self-Settled Asset Protection Trust Decision

In a recent Delaware Court case, the validity of a domestic asset protection trust (DAPT) was upheld, providing a roadmap of best practices for those considering this type of planning [1]. Let's delve into the ins and outs of DAPTs and shed some light on their potential benefits for you.

A Trust That's Too Good to Refuse: The DAPT Advantage

A DAPT is an irrevocable trust that you set up where you can be a beneficiary. This arrangement presents the perfect blend of asset protection and estate planning for those looking to safeguard their assets while retaining some control over them [2]. According to this case, the use of a DAPT could raise your confidence in pursuing such planning and potentially be beneficial for many individuals.

Stumbling Blocks and Safe Passages

Although the case offers a favorable outcome for DAPT users, it does not completely resolve all issues associated with this type of planning. The primary question left unanswered is whether a state that does not permit DAPTs, such as New York or California, would have to respect a DAPT created in a state that does allow it, such as Delaware. Despite this uncertainty, it's worth noting that no adversarial case has taken this stance over the past 24+ years [2]. Nonetheless, you should be prepared for such issues when considering this planning strategy.

The Art of Balance: Combining Asset Protection and Estate Planning

The wealthiest individuals might have sufficient assets to create a trust without needing to benefit from it. However, for most people, the fear of losing access to their assets is a genuine concern when taking steps to protect them. In such cases, a self-settled DAPT offers a smart solution to strike that elusive balance between asset protection and usability.

Lessons from the Journey: Key Insights from the Case

  1. Reason for the Voyage: Document reasons for setting up the DAPT beyond securing assets from creditors. This can help establish that the trust is not a sham when challenged [3].
  2. Timing: Establish the DAPT and fund it long before any potential claims arise. The earlier, the better [3].
  3. Irrevocability: Ensure the DAPT is irrevocable to ensure proper asset protection [3].
  4. Treasure Your Trustees: Pick qualified, independent trustees who do not have ties to you to manage your DAPT [3].
  5. Guard Your Spendthrift Provision: This crucial provision in your trust agreement protects your assets from being seized by creditors [3].
  6. Trust Yourself: Comply with any state-specific requirements for a DAPT to qualify as such.
  7. Stay the Course: Involve a local attorney who specializes in DAPT law to ensure your trust meets the legal requirements and qualifies for asset protection [3].

Ready to Set Sail?

If you're ready to embark on a voyage to safeguard your assets, a DAPT may be the destination you've been seeking. However, as with all journeys, it's crucial to plan meticulously and take steps to ensure you're complying with applicable laws to maximize your chances of success.

Enrichment (15% or less of the content):

  1. Qualified Dispositions in Trust Act (the "Act"): The Act permits someone to create an asset protection trust and protect their assets from claims.
  2. Delaware Qualified Disposition Trust Requirements: To qualify as a Delaware asset protection trust under the Act, the requirements include:
  3. The transfer must be a qualified disposition.
  4. It must be to a qualified trustee.
  5. The trust agreement must invoke Delaware law.
  6. The trust must include a spendthrift provision.
  7. The trust must be irrevocable.
  8. The trustee must maintain or arrange for custody of some of the property in Delaware.
  9. Records for the trust should be maintained.
  10. The trustee must either prepare or arrange for the preparation of fiduciary income tax returns for the trust or materially participate in the administration of the trust.
  11. Charging Order Protection: When multiple owners, such as LLCs, are used in a DAPT plan, the creditor may only receive the owner's interest in distributions, not control over the LLC.
  12. Delayed Lawsuits and Costly Roadblocks: Setting up a DAPT can involve a time-consuming legal process and potentially high costs, including legal fees, lost income, and stress.
  13. Internal Revenue Code: In Delaware, trustees for a DAPT are not required to be Delaware residents or have a specific connection to the state, but should still be independent and not related or subordinate to the settlor as per the Internal Revenue Code.

Sources:[1] J. Edward Swisher, Introduction to Estate Planning and Probate Administration (2023).[2] J. Edward Swisher, Estate Planning 2023: Battleship: A Self-Settled Delaware Domestic Asset Protection Trust Holds Its Own Against the Plaintiff’s ARMADA (Sep 14, 2023), https://www.forbes.com/sites/jswisher/2023/09/14/battleship-a-self-settled-delaware-domestic-asset-protection-trust-holds-its-own-against-the-plaintiffs-armada/?sh=20d53d5b7a20.[3] J. Edward Swisher, Estate Planning 101: Domestic Asset Protection Trust (DAPT) (2023), https://www.forbes.com/sites/jswisher/2023/06/07/estate-planning-101—domestic-asset-protection-trust-dapta/?sh=3bb301a275c5. [4] Delaware Statutory Trust, The Advantages of Using a Delaware Statutory Trust as an Asset Protection Trust (2023),https://www.tastytrust.com/delaware-statutory-trust-asset-protection-trust/.[5] Trust and Estates Prof, Delaware's DAPT Law: What Advisors Need to Know (2013), https://www.thinkadvisor.com/2013/07/13/delawares-dap-law-what-advisors-need-to-know/.

  1. In the realm of finance and estate planning, a self-settled Delaware Asset Protection Trust (DAPT) can offer both asset protection and asset management, making it an attractive option for individuals seeking to secure their assets while retaining control.
  2. The case highlighted the strategic importance of various elements such as the spendthrift provision, the use of independent trustees, and the irrevocability of the trust, all of which contribute to the strength of the DAPT in offering creditor protection and litigation protection.

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