A Domestic Asset Protection Trust (DAPT) is an irrevocable trust a person creates for their own benefit under the law of one of a minority of US states that have abolished the old rule voiding self-settled trusts, letting the person who funded it remain a discretionary beneficiary while shielding the trust’s assets from most future creditors.
In plain terms
For most of American legal history, a trust you set up for yourself protected you from nobody — the law assumed a settlor who could benefit from a trust could also be forced to hand its assets to a creditor. Starting with Alaska in 1997, a growing list of states rewrote that rule by statute. A resident of Nevada, South Dakota, or one of roughly twenty other states can now fund a trust, keep the right to discretionary distributions, and still get real protection — provided the case ends up in front of a court that respects that state’s statute.
How it works
The settlor transfers assets to an irrevocable trust with an independent trustee resident in a DAPT state, keeps no legal right to demand distributions, but can be named a discretionary beneficiary. The trust is normally paired with a spendthrift clause barring creditors from reaching a beneficiary’s interest directly.
Every DAPT state sets a statute of limitations for challenging the initial transfer as a fraudulent conveyance. Nevada’s is among the shortest: a future creditor has two years from the transfer, and an existing creditor has the later of two years from the transfer or six months from when they discovered it — after which the transfer can no longer be unwound.
That state-law clock does not bind a bankruptcy court. Under federal law, a bankruptcy trustee can avoid any transfer to a self-settled trust made within the ten years before the filing if it was made with intent to hinder, delay, or defraud creditors — a much longer reach than any state’s statute, per 11 U.S.C. § 548(e).
The numbers
- 1997: Alaska becomes the first state to authorize self-settled DAPTs.
- Roughly 20 states now permit them; none of the five most populous states — California, Texas, Florida, New York, Pennsylvania — do.
- Nevada NRS 166.170: 2-year statute of limitations for future creditors; existing creditors get the later of 2 years from transfer or 6 months from discovery.
- 11 U.S.C. § 548(e): 10-year federal lookback in bankruptcy for transfers made with actual intent to defraud.
What people get wrong
That a DAPT statute in the state where the trust is drafted controls the outcome no matter where the settlor lives or is sued. It doesn’t automatically. In Waldron v. Huber (Bankr. W.D. Wash. 2013), a Washington resident funded an Alaska DAPT; when he filed bankruptcy, the Washington court held that Washington — not Alaska — had the closer relationship to the trust, applied Washington’s own hostility to self-settled trusts, and voided the transfers under both state and federal law. A DAPT reliably protects a resident of a DAPT state sued in that state’s courts. It is a much weaker bet for anyone who lives, works, or gets sued somewhere else.
Related
Read more: Asset Protection: How the Wealthy Reduce Exposure to Risk · Trusts: How Wealth Is Held, Protected, and Passed On
See also: Irrevocable trust · Spendthrift clause · Offshore trust · Family limited partnership