The Domestic Asset Protection Trust


The Domestic Asset Protection Trust

By Kyle Mostransky, LUTCF®, CLTC
Posted on April 16, 2017

Asset protection has become a much discussed area of law and has become the ideal complement to estate planning. Consequently, the Domestic Asset Protection Trust (DAPT) has become an asset protection tool in the planner’s toolbox. As more states have enacted DAPT legislation, practitioners have started doing more DAPTs for their clients. Financial advisors must be knowledgeable in this area in order to understand the opportunities for their clients.

A DAPT is an irrevocable trust in which the trust settlor is a discretionary beneficiary along with other discretionary beneficiaries. After a period of time called the “statute of limitations,” it is possible the DAPT assets could be protected from the settlor’s creditors. The statute of limitations applicable to the trust depends upon which of the DAPT jurisdictions is used for the trust. In addition, all DAPT jurisdictions except for Nevada and Utah have at least one type of exception creditor who can pierce through the DAPT. In many of these jurisdictions, divorcing spouses, alimony creditors, child support creditors, pre-existing tort creditors and other classes of creditors are exception creditors who can pierce through the trust.

After approximately 20 years since the first DAPT legislation passed, there are no known cases where a creditor has been able to pierce through a DAPT in a non-bankruptcy, non-fraudulent conveyance situation. This may be the case because most creditors feel that winning in court is such an expensive, uphill battle that they are better off settling the dispute before it gets that far. However, despite the potential for protection, whether through a settlement or through the court system, if there is a way to increase the odds of success even more, then such a strategy should be considered since some practitioners still feel that a regular DAPT can be pierced by a creditor of the settlor.

The Hybrid Domestic Asset Protection Trust

The Hybrid Domestic Asset Protection Trust (Hybrid DAPT) is a strategy that may increase the probability that the trust assets will be protected. The Hybrid DAPT is just like a regular DAPT except that the settlor isn’t a discretionary beneficiary of the trust, but can be added later by a trust protector at the trust protector’s complete discretion. Thus, the trust is initially set up for the benefit of the settlor’s spouse and descendants, for example, but not for the settlor. By not including the settlor as a beneficiary of the trust, the Hybrid DAPT is by definition a third-party trust and therefore generally avoids the potential risk of uncertainty of a regular DAPT.

Where the settlor is married and has a strong, trusting relationship with his or her spouse, the settlor may be able to indirectly access the trust assets through the spouse. And the trust agreement should define the “spouse” using a “floating spouse provision” that defines the spouse as the person the settlor is married to from time to time. This gives the settlor the ability to access the trust assets through a subsequent spouse in the event of a divorce or the death of the settlor’s spouse.

If the settlor has no spouse, then it becomes more difficult to access the assets using this technique. However, since a good asset protection planner will be sure to leave sufficient wealth outside of the client’s asset protection trust, the settlor may not have to work through this issue anytime soon.

If the Settlor is added as a Beneficiary

In case the settlor needs to be a discretionary beneficiary of the Hybrid DAPT sometime in the future (i.e., if the settlor has no spouse or child that will “share” a distribution with the settlor and the settlor now needs a distribution), the trust agreement provides that the trust protector can add additional beneficiaries, including the settlor. However, if the settlor is added, then the Hybrid DAPT becomes a regular DAPT and thus risks that the law is still unsettled on DAPTs. Additionally, it will be important to ensure there is no pre-determined arrangement between the settlor and trust protector.

If the settlor suspects that a creditor attack may be forthcoming, the trust protector could remove him or her as a discretionary beneficiary.

The Completed Gift Hybrid DAPT

Most DAPTs are designed as Incomplete Gift DAPTs where the sole objective is asset protection. However, many DAPTs are designed as Completed Gift DAPTs where the settlor is a discretionary beneficiary of a trust designed with the following attributes and objectives:

  1. It’s a completed gift for gift tax purposes
  2. The settlor is a discretionary beneficiary
  3. The trust assets are protected from the settlor’s creditors
  4. The trust assets are outside of the settlor’s estate for estate tax purposes

In PLR 200944002, the Internal Revenue Service held that a Completed Gift DAPT would not be included in the settlor’s estate where the settlor / resident of a DAPT jurisdiction established the DAPT using the laws of that DAPT jurisdiction.

However, with respect to a resident of a non-DAPT jurisdiction, whether the trust assets are open to creditors of the settlor is still uncertain since it is unclear which state law will apply for creditor purposes. Additionally, it is important to note that Private Letter Rulings only apply to that taxpayer who applied for it.

The Completed Gift Hybrid DAPT reduces this risk since the settlor isn’t a discretionary beneficiary of the trust and, thus, it isn’t a self-settled trust. In an ideal scenario, the settlor will never need to be added as a discretionary beneficiary by the trust protector.

The Completed Gift Life Insurance Hybrid DAPT

Life insurance policies are often owned by an irrevocable life insurance trust (ILIT) in order to remove the death benefit from the insured’s taxable estate. However, especially for insurance products that have high cash value, the insured is often torn between saving estate taxes and having access to the cash value. Also important in this analysis is the perceived risk inherent in the uncertainty of whether a traditional Completed Gift DAPT will ultimately be determined to be out of the settlor’s estate.

The Completed Gift Life Insurance Hybrid DAPT may be a potential solution to this dilemma since it acts like a traditional third-party ILIT until and unless the trust protector adds the settlor in as a discretionary beneficiary and thus may not take any significant risk until this time. And if the settlor is at the point where accessing cash value is necessary, the settlor’s estate may be to the point where estate taxes aren’t an issue or are less of an issue. If the settlor has significant assets and merely has a liquidity issue, then the settlor could simply sell illiquid assets to the trust in order to access cash.


It is imperative that the asset protection planner create a plan with the highest probability of success. In some cases, it is possible to significantly increase the protection by simply using a Hybrid DAPT rather than a traditional DAPT. This article describes this structure and also describes a unique ability to take advantage of this technique in order to enhance the traditional ILIT.

About Kyle

Kyle Mostransky is the founder of Mostransky & Associates with more than a decade of experience providing retirement planning and insurance services. He specializes in helping successful business owners, families, and individuals grow, protect, and distribute their financial resources in a manner that’s in alignment with their objectives and values. Passionate about education and understanding the life insurance industry, he is a Life Underwriter Training Council Fellow (LUTCF®) and holds the Certified Long-Term Care designation (CLTC®). Based in Huntington, New York, Kyle serves clients throughout the greater New York City metropolitan area and across the country. To learn more, connect with Kyle on LinkedIn or visit

Kyle Mostransky, CLTC, LUTCF®, California Insurance License #0H17709, is a Registered Representative offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, A Licensed Insurance Agency, 15 Green Street, Huntington, NY 11743, (646) 227-8384. Member Agent, The Nautilus Group®, a service of New York Life Insurance Company. New York Life, its agents or employees may not give legal, tax or accounting advice; everyone should seek and rely upon the counsel of his or her own professional advisors. Mostransky & Associates LLC is not owned or operated by New York Life or its affiliates. SMRU 1731845 12.31.2017

This material was produced by The Nautilus Group. It is being provided by Kyle Mostransky as a courtesy.