More and more people who are interested in estate planning are learning about domestic asset protection trusts (DAPTs), which offer an important advantage regarding estate taxes and income. DAPTs allow you to appoint yourself as a beneficiary of the trusts. DAPTs are not a wise estate planning tool for everyone, however. Instead, DAPTs work best if your career is high risk and moving some of your assets into an irrevocable trust will not have a significant impact on your financial situation. Frequently, DAPTs are used in combination with other estate planning documents.
The Role of DAPTS
Similar to irrevocable trusts, DAPTS offer increased flexibility regarding estate planning for clients. Michigan is just one of 17 states that have laws that allow the creation of DAPTs. For individuals who do not live in these states, a trust can still be created in one of the 17 states using a trustee. Once assets are placed into a DAPT, the trust creator permanently gives up those assets. Because a trust creator can name him or herself as a beneficiary, though, there is a possibility that he or she might retain some management rights regarding the trusts assets.
The Advantage of DAPTs
The primary advantage of DAPTs is that they offer asset protection. As a result, a person is able to place assets into a trust to be dispersed so that they can be used post-retirement. DAPTs also offer tax advantages. New tax laws have temporarily doubled estate tax exemptions from $5 to $11 million. While a person might not have this amount currently, an estate that grows to this amount by 2026 will place an individual above the exemptions limits.
How to Structure a DAPT
There are several methods used to structure a DAPT, which include:
- A client signs a solvency affidavit, which confirms that he or she will have the assets necessary after the transfer to pay for all future expenses. Some clients decide to support this statement with a current balance sheet and financial forecast, which help to provide a more fleshed-out picture about the clients finances.
- The client is not listed as a current beneficiary of the trust. Instead, someone is appointed in a non-fiduciary capacity to name descendants. If the client ends up needing any of the assets placed in the DAPT in the future, the client can be added as a descendant. The client will be unable to receive funds unless he or she is added.
- Someone else received the power to direct the trustee to make distributions to the client.
Speak with an Experienced Michigan Estate Planning Lawyer
No matter if you use them for asset protection or estate tax planning, DAPTs can be a particularly powerful tool because they present a way to secure assets while still leaving those assets accessible. If you are interested in creating a DAPT, you should not hesitate to contact an experienced estate planning lawyer. Contact Resnick Law today to schedule a free initial consultation, during which time we will discuss how to best resolve your case.
(image courtesy of Kody Gautier)