Domestic Asset-Protection Trusts for Estate Planning
1. Using a Domestic Asset Protection
Trust for Estate Planning
Authored by Ward J. Wilsey, JD, LLM
Provided and utilized by WFB Legal
Consulting, Inc. with thanks and
acknowledgement
2. The Domestic Asset Protection Trust
Self-Settled Spendthrift Trust
Grantor sets a trust up for his or her own benefit, and has
the assets immune from creditors
Traditionally, one cannot set up a trust for their own
benefit and have it protected from their creditors
California Probate Code Section 15304(a)
Some states have done away with this restriction on
“Self-Settled Spendthrift Trusts”.
Alaska, Nevada, Delaware, Wyoming, South
Dakota, Oklahoma
3. Requirements for DAPT
Formed in DAPT State
Irrevocable
Independent Trustee
Trust company
Individual Resident of DAPT state
Discretionary Trust
Trustee has the full discretion on how and when
to make distributions
4. DAPT
Grantor/Beneficiary may make requests to the
Trustee for distributions
Distributions are fully in the Trustee’s discretion
Lack of control is what creates asset protection
Fear of Trustees run amuck
Trust Protector assures Trustee compliance with
Grantor’s intentions
Trustee only given control over Ownership in a
FLLC or FLP (discussed further later)
5. Creditor Protection Problems of DAPTs
Full Faith and Credit Clause of the
Constitution
Is one state forced to accept the law of another?
So far no real case law
Opinion of Presenter
No real case law is a good sign that DAPTs are
excellent asset protection devices
6. Question
Can an individual or married couple make
completed gifts to a Domestic Asset
Protection Trust and have those assets outside
of their estate for estate tax purposes, while
having the ability to receive those assets from
the trustee if needed?
7. Problems
IRC 2036
1. Decedent’s gross estate includes assets which he/she has
transferred but has retained
a. The possession or right to enjoy the assets
b. The right to determine who will enjoy the assets
IRC 2038
1. Decedent’s gross estate includes any transfer by which
such transfer was subject to a power where the
decedent, along or in conjunction with another
person, had the right to alter, amend or revoke
Within 3 years of death
8. Basic Rule of DAPT’s for Estate Tax
Inclusion
If the Grantor’s creditors cannot reach the
assets, then the assets are out of the Grantor’s
estate.
Ltr. Rul. 9837007;
Ltr. Rul. 9332006;
Estate of German, 7 Cl. Ct. 641, 55 AFTR2d 85-1577 (Ct.
Cl., 1985);
Estate of Uhl, 241 F.2d 867, 50 AFTR 1746 (CA-
7, 1957).
Estate of Wells, TCM 1981-574.
9. Estate of German, 7 Cl. Ct. 641, 55
AFTR2d 85-1577 (Ct. Cl., 1985)
Self Settled Discretionary Trust
Grantor was a beneficiary
Court ruled that the assets were not in the
Grantor’s estate
because the IRS could not prove that they were
within the reach of the Grantor’s creditors.
10. Ltr. Rul. 9332006
Partnership interests transferred to Offshore
Asset Protection Trust
Partnership assets not includible in the
Grantor’s estate
Grantor had no right to compel distributions
Distributions were at the discretion of the
trustee.
IRC 2036 and 2038
11. Priv. Ltr. Rul. 9837007
Alaska Asset Protection Trust
IRS ruled that gift to such a trust was
completed for gift tax purposes
Because assets are out of reach of the
creditors
How can this possibly mean assets are includible
in estate?
Not answered in PLR
12. Conclusion
Assets transferred to a DAPT should not be subject
to estate taxes
No authority to the contrary
IRS acquiescence
Case law support
If you make a completed gift of assets to a
DAPT, those assets are outside of your estate for
estate tax purposes, despite your ability to access
those assets if necessary
Forget about the creditor protection, this is the real benefit
13. DAPT in Estate Planning
Making gifts while retaining benefit of assets
if needed.
Example
Husband and Wife gift $1,000,000 of $5,000,000
estate to DAPT
Husband and Wife primary beneficiaries, kids
secondary
Husband and Wife now have creditor protected
slush fund that’s out of their estate
14. Using a Family LLC with a DAPT
Client creates FLLC
Gifts membership interest into DAPT
33% discount
$1,500,000 in underlying assets using $1,000,000 gift tax
exemption
Client is primary beneficiary
Client retains ultimate control as manger of LLC
Client can hire any advisors
Client can keep accounts at current location
Trustee has control of only Ownership Certificates
15. Gifting using DAPT
1. Client has
assets worth
$1,500,000
2. Client forms Family
Limited Liability Company
with $1,500,000, runs
FLLC as manager
3. Client gifts
membership interests
into DAPT, gets 33%
discount, uses
$1,000,000 exemption
4. Client is beneficiary of
DAPT, can receive
distributions at Trustee’s
discretion
Family
LLC DAPT
17. Compare to SLAT
Spousal Limited Access Trust
H creates trust for W, with W as trustee and primary
beneficiary
Vice versa for wife
Pros
Simpler
No Trustee fees
Cons
Reciprocal Trust Doctrine
Less Asset Protection
Cannot use for Survivor Policy
18. Client Profile
Net Worth of $7,500,000 or more
Concerns about estate taxes
Wants to retain control and possible use of
assets