Quora Answer: Does an Irrevocable Trust or a Domestic Asset Protection Trust Provide Better Protection from Creditors?

The following is my answer to a Quora question: “What provides better asset protection from creditors: an irrevocable trust or a domestic asset protection trust?”

An irrevocable trust is simply a trust which may not be terminated, nor may the trust document be modified, once the settlor  or grantor has transferred assets into the trust, with the permission of the beneficiaries.  The trust is a distinct legal entity, and the settlor has no direct legal ownership.

A Domestic Asset Protection Trusts (DAPT) is a variation of an irrevocable trust, set up in the US.  The legal status, and protections afforded vary from state to state, however, as the name suggests, the trust must be for assets within, or accessible from within, the US, and the trust must be registered in the US.  From an American legal perspective, it prevents capital flight.  From the settlor’s perspective, the trust is not subject to political risk.

A DAPT does not allow the beneficiaries to assign their interest to a third party.  They also, like all revocable trusts, protect the assets from claims upon the settlor or beneficiary.  This includes claims in matrimonial settlements since they are not, ordinarily, part of matrimonial assets.  Trusts also mitigate tax exposure.

In summary, since a DAPT is a variation of an irrevocable trust, the protection is essentially the same.  The main difference is that trusts are often based in tax havens, or places with a lower tax regime.  The US is not such a place.  The DAPT is a vehicle created specifically to grant some of the same protections of any irrevocable trust, but to encourage settlors to keep their estates within the country.