Domestic Asset Protection Trust: What It Is & How It Works

A Domestic Asset Protection Trust (DAPT) is an irrevocable trust established within the United States to shield assets from the claims of potential future creditors. This trust is a component of estate planning, allowing a grantor to place assets under its protection. The DAPT is a self-settled trust, a feature that permits the grantor to also be a permissible beneficiary. By transferring ownership of assets to the trust, the grantor legally separates them from their personal estate.

Core Features of a Domestic Asset Protection Trust

A defining characteristic of a DAPT is its irrevocable nature. Once the grantor establishes the trust and transfers assets into it, they cannot alter or dissolve the trust on their own. This permanency is fundamental to the trust’s protective capabilities because the grantor has relinquished direct control. This structure is distinct from a revocable trust, where assets remain vulnerable.

Another element is that a DAPT is “self-settled,” which means the grantor who funds the trust can also be named as a beneficiary. This allows the grantor to receive distributions from the trust assets, a feature not typically available in other types of irrevocable trusts. The ability for the grantor to benefit from the trust they created is a unique aspect of DAPT legislation.

The operation of a DAPT requires an independent trustee. This individual or institution is responsible for managing the trust’s assets and making distribution decisions. The trustee must be independent, meaning they cannot be a subordinate or related party to the grantor, to ensure that decisions are made at arm’s length. This independence upholds the trust’s integrity.

A “seasoning period” is a statutorily defined waiting period that begins after an asset is transferred into the trust. Before this period expires, the assets may still be vulnerable to certain creditor claims. The length of this period varies by state, typically ranging from 1.5 to four years, after which the trust’s full protection takes effect.

State Jurisdictions and Domicile Requirements

A DAPT is permitted only in states that have enacted specific legislation. As of 2025, the states authorizing these trusts are:

• Alabama
• Alaska
• Arkansas
• Connecticut
• Delaware
• Hawaii
• Indiana
• Michigan
• Mississippi
• Missouri
• Nevada
• New Hampshire
• Ohio
• Oklahoma
• Rhode Island
• South Dakota
• Tennessee
• Utah
• Virginia
• West Virginia
• Wyoming

Each jurisdiction has its own statutes governing the creation and administration of DAPTs.

Creating a valid DAPT requires establishing a legal connection, or “nexus,” to the chosen state. This is achieved by appointing a trustee who is a resident of or is authorized to conduct business in that jurisdiction. A person in a state without DAPT laws can establish a trust in a DAPT state by engaging a local individual or corporate trustee.

This trustee is responsible for administration within the state, such as maintaining trust records or preparing tax returns. Some jurisdictions have additional requirements, such as mandating that a portion of the trust’s assets be held within the state. These domicile rules ensure the trust is governed by the laws of the selected state.

Information and Decisions for Establishing a DAPT

The first decision is the selection of a qualified trustee. This trustee must reside or be an authorized institution, like a bank or trust company, within one of the states that permit DAPTs. The trustee holds significant responsibility, including managing trust assets and making distribution decisions.

Next, the grantor must conduct a thorough inventory and valuation of the assets they intend to transfer into the trust. These assets can range from cash and securities to interests in limited liability companies (LLCs) and real estate. Each asset must be evaluated to determine its suitability for the trust, considering legal, tax, and business implications of the transfer.

The grantor must also define the terms for distributions and name other beneficiaries in addition to themselves. The trust document needs to outline who the beneficiaries are and under what circumstances the trustee can distribute trust income or principal. DAPT statutes require at least one other beneficiary to be named.

A prerequisite is the solvency of the grantor, who must not be attempting to defraud known or existing creditors. To formalize this, the grantor is required to sign a sworn “Affidavit of Solvency” for each transfer. This legal document attests that the transfer will not render the grantor insolvent and that there is no intent to hinder existing creditors.

The Establishment and Funding Process

The first action step is to engage a qualified attorney to draft the official trust agreement. This legal document is the blueprint for the DAPT, outlining the irrevocable terms, trustee, beneficiaries, and distribution standards. The agreement must comply with the specific statutory requirements of the chosen DAPT state.

Following the drafting of the trust document, the next step is its formal execution. This involves the grantor signing the trust agreement, which legally brings the DAPT into existence. At this stage, the grantor also signs the required Affidavit of Solvency, affirming their financial stability and the legitimate purpose of the asset transfers.

The next action is “funding” the trust, as an unfunded trust offers no protection. Funding involves legally retitling the selected assets from the grantor’s name into the name of the trust. For real estate, this means executing a new deed, while for financial accounts, it requires changing the account ownership. For business interests, it involves formally assigning the ownership interest to the trust.

The final step is to obtain a new Taxpayer Identification Number (TIN) for the trust from the IRS. As a separate legal entity, the DAPT must have its own TIN for tax reporting. This number is used by the trustee to open financial accounts and file required tax returns.

Federal Tax Considerations

For federal income tax purposes, most DAPTs are structured as “grantor trusts.” This means the trust itself does not pay federal income taxes. Instead, all income, deductions, and credits are passed through to the grantor and reported on their personal income tax return, as allowed under Internal Revenue Code Section 677.

Whether funding the trust constitutes a “completed gift” depends on the trust’s terms and the powers retained by the grantor. If the transfer is a completed gift, it may be subject to federal gift tax and require filing a Form 709 if the value exceeds the annual exclusion amount. Filing this return begins the statute of limitations for the IRS to challenge the asset valuation.

Whether the assets within a DAPT will be included in the grantor’s gross estate for federal estate tax purposes is a significant consideration. If transfers to the trust were structured as incomplete gifts, the assets will be included in the grantor’s estate. Conversely, if the transfers were completed gifts, the assets and their future appreciation may be excluded from the estate.