Completed Gift Domestic Asset Protection Trusts
May 21st, 2021
In recent blog posts, we have been discussing potential changes to tax law under the Biden administration, and tax strategies to deal with those changes. One very useful tax and estate planning strategy involves completed gift domestic asset protection trusts. Let’s take a look at what completed gift domestic asset protection trusts are, their advantages, and whether they might be right for your particular needs.
What is a Completed Gift Domestic Asset Protection Trust?
A domestic asset protection trust, or DAPT, is a self-settled, irrevocable trust which is managed by a third-party trustee. The trustee controls the assets in the trust and makes distributions to the beneficiaries. The term “self-settled” refers to the fact that the creator of the trust, also known as the “trustmaker,” “grantor,” or “settlor,” funds the trust with assets and is often also a beneficiary of the trust.
The trust cannot be revoked, and the assets cannot be unilaterally reclaimed by the trustmaker. The trustee is independent from the trustmaker, which means that beneficiaries, including the trustmaker, cannot demand a distribution of trust assets. Because the trustmaker/beneficiary does not have control of trust assets, those assets are also out of the reach of the trustmaker/beneficiary’s creditors. However, while the trustee is independent from the trustmaker, the trustmaker may choose whomever she chooses to serve in that role.
Where does the “completed gift” aspect of the DAPT come into play? Well, under federal law, an individual can give away a certain amount of assets during their lifetime without incurring gift or estate tax. In 2021, that lifetime exemption amount is $11.7 million per individual, or $23.4 million for a married couple. That figure changes annually with inflation and also with changing tax laws. For instance, the Tax Cuts and Jobs Act of 2017 increased the lifetime exemption amount, but it is due to return to previous levels after 2025.
If you have a DAPT, you can gift any amount up to your lifetime exemption amount to the trust. In doing so, you avoid paying gift or estate tax on those assets, while keeping those assets available for your benefit. Structuring the trust as a completed gift lifts the gifted assets, and any future appreciation of those assets, straight out of your taxable estate.
Advantages of a Completed Gift DAPT
Completed gift DAPTs offer numerous benefits. Like all trusts, the assets in a completed gift DAPT avoid probate, leading to easier administration and more privacy regarding the assets in an estate. But completed gift DAPTs offer so much more. A properly-drafted and funded completed gift domestic asset protection trust:
- Allows the trustmaker to transfer assets without incurring gift and estate tax;
- Protects trusts assets from future creditors of the trustmaker and other beneficiaries of the trust (there are some limited exceptions, such as alimony and child support obligation owed by a beneficiary);
- Provides the same protections as an offshore trust, with less risk;
- Ensures a short statute of limitations for creditors (1.5 years) in Ohio relative to most other states that allow DAPTs;
- Keeps assets available for the trustmaker’s use, if the trustmaker is a beneficiary;
- Provides for significant liquidity for heirs to pay estate tax liability, if any. This eliminates the need for heirs to sell assets such as a family farm or business in order to pay taxes;
- Can be structured to keep income tax reported very straightforward.
The unique combination of creditor protection, estate tax protection, income tax simplicity, and the ability to continue to benefit from trust assets is what makes completed gift domestic asset protection trusts attractive to so many people.
You can also create an additional layer of protection for assets. Your estate planning attorney can create a limited liability company (LLC) that will be owned by the DAPT. A creditor seeking trust assets would have to penetrate not only the trust, but the LLC. What’s more, the trustmaker/beneficiary is allowed to manage the LLC, giving them greater control over the investment of the assets held by the LLC.
Is a Completed Gift Domestic Asset Protection Trust Right For You?
While completed gift DAPTs have numerous benefits, they are not right for everyone, and they may offer more protection (and restrictions) than some people need. That said, completed gift DAPTs may be especially beneficial for business owners and professionals who could become targets of lawsuits because of their work and want to shield family assets.
If you have existing creditors, creating a DAPT now will not place assets in the trust out of their reach. You are also only permitted to place in the trust assets in excess of those required for your solvency. Ohio is consistently rated one of the top states for DAPTS. You do not need to live in Ohio in order to have an Ohio DAPT. However, the independent trustee and at least some of the trust assets must be located in Ohio.