Domestic Asset Protection Trust (DAPT)

Domestic Asset Protection Trust (DAPT)

Effective January 1, 2020, Connecticut adopted the “Connecticut Qualified Dispositions Trust Act”, which permits the establishment of self-settled domestic asset protection trusts (DAPTs). DAPTs are irrevocable, self-settled trusts, which permit the person establishing the trust (the “grantor” or the “settlor”) to fund the trust with his or her own assets and to remain a beneficiary of the DAPT.  If properly structured, the DAPT will shield the assets from claims of most future creditors of the grantor.

In order to establish a DAPT, the grantor will create an irrevocable trust and transfer their assets to the newly established trust.  The irrevocable trust must meet three requirement: (i) the trust must have a “qualified trustee” as one of the trustees, (ii) the trust document must incorporate Connecticut law to govern its validity, construction, and administration; and (iii) the trust document must include a spendthrift clause.

A qualified trustee cannot be the grantor (or any other individual who transferred assets to the trust) and must be either an individual residing in Connecticut or an entity authorized by Connecticut law to act as trustee.

Even though the transfer of property to the DAPT is irrevocable, the grantor can nevertheless maintain significant rights and powers over the DAPT.  For example, the grantor can retain the rights to: (i) receive income; (ii) receive principal (subject to the trustee’s exercise of discretion and compliance with a distribution standard); (iii) receive up to five percent (5%) of the value of the trust property every year; and (iv) veto a distribution from the trust. The grantor can also have a limited power to appoint the trust assets at death, under the terms of their Last Will and Testament. Additionally, the grantor can have the power to remove a trustee and appoint a replacement trustee, so long as the replacement is considered “independent” under certain provisions of the Internal Revenue Code.

The property held in a Connecticut DAPT will generally be protected against creditor claims, except fraudulent transfer claims under the Connecticut Uniform Fraudulent Transfer Act, certain child support and marital support obligations, and tort claims that arose before the transfer of assets to the Connecticut DAPT. Claims that arise after a transfer of property into a Connecticut DAPT are subject to a four-year statutes of limitations period.  Because the settlor can receive income and principal from the trust, the DAPT is not a Medicaid planning trust.

The asset protection offered by the DAPT makes this planning technique particularly valuable to business owners and professionals in high risk occupations, such as executives and medical professionals; as well as to any individual with assets that they would like to protect from future creditors.