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Hybrid Domestic Asset Protection Trust

A domestic asset protection trust, or DAPT, is an irrevocable trust that allows the trust owner to act as a discretionary beneficiary. Essentially, this means the trust’s creator retains limited access to the assets while those assets are shielded against creditor claims. The trust maker’s creditors cannot access assets contained in this type of trust.

Few U.S. states have laws on the books that expressly permit DAPTs. In 2020, the Probate and Trust Section of the Arizona State Bar recommended approving these self-settled protection trusts. However, there has been little movement to legalize them statewide. In the meantime, Arizona law allows for a hybrid domestic asset protection trust. But how does this type of trust work? And can it protect your assets from creditors?

We at Pennington Law, PLLC, want to help you protect your assets and thoroughly evaluate all your options for safeguarding your wealth. Is a hybrid domestic asset protection trust a good option for you in Arizona? We can help you answer that question and more. Contact our office today to arrange a confidential consultation. Our team wants to help you create an estate plan that checks all your boxes.

How Does a Hybrid DAPT Work?

How does an Arizona hybrid DAPT protect your assets? As the trust creator, you transfer ownership of selected assets into the irrevocable trust. By doing this, the assets are technically no longer your property or under your control. They are “owned” by the trust, and an independent trustee takes over the assets’ management per the hybrid DAPT agreement stipulations.

Once you have established a hybrid DAPT, you must select a trustee to administer assets held in trust for named beneficiaries. Assets in the trust generally qualify for protection from known and unknown creditors. However, you lose the ability to manage assets once you place them in the trust.

What Is a Hybrid Domestic Asset Protection Trust?

A hybrid domestic asset protection trust is an estate planning tool you can use to protect your assets from creditors. In areas of the country where domestic asset protection trusts are not authorized, hybrid domestic asset protection trusts give individuals the “best of both worlds.” A hybrid DAPT keeps assets out of the reach of creditors and exclusively benefits named beneficiaries.

Arizona law allows you to protect your assets from creditors by establishing a hybrid domestic asset protection trust. The spendthrift provisions within a trust protect its assets from creditors. The assets in a hybrid DAPT can only go to named beneficiaries. The key difference between standard and hybrid DAPTs is that you cannot name yourself as an eligible beneficiary as the trust maker of a hybrid DAPT.

 

Domestic Asset Protection Trusts
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How Does a Hybrid DAPT Differ from Other Protection Trusts?

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Traditional domestic asset protection trusts are not legal in the state of Arizona. Only a handful of states allow this type of trust. Self-settled types of asset protection trusts, like standard DAPTs, did not exist in the United States until 1997. Alaska was the first state to enact a DAPT statute.

Traditional DAPT protection trusts protect assets from creditors and allow the trust creator to retain limited access to those assets. In most instances, creditors cannot access these assets at all, shielding them from seizure. However, where DAPTs are legal, different jurisdictions have different time limits on how long an asset can be protected from creditors.

Under the hybrid model, trust creators cannot retain access to assets within the trust or name themselves as eligible beneficiaries. When trust creators add assets to a hybrid irrevocable DAPT, they lose the right to control those assets. However, this adds another layer of protection to the assets held in the trust. It protects the assets from creditors because if the trust creator is not listed as a permissible beneficiary, there is little room for a creditor to pursue a claim against the trust or trust maker.

You might also hear about foreign asset protection trusts when considering asset protection options. These offshore asset protection trusts can make it virtually impossible for U.S.-based creditors to reach the assets contained in the trust. However, creating a foreign trust to protect your assets can have drawbacks and limitations. These trusts are usually only feasible for individuals with specific financial concerns and considerations.

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Pros and Cons of Hybrid Domestic Asset Protection Trusts

Hybrid Domestic Asset Protection Trusts

As with any trust or estate planning option, there are pros and cons of a DAPT. A hybrid domestic asset protection trust is irrevocable, meaning that the trust cannot be changed or canceled by the creator or grantor once it’s established. It takes a court order to modify the terms of an irrevocable trust. And although a hybrid trust protects most assets from creditors, the grantor still forfeits their ownership and authority over the assets and management of those assets.

Remember, a traditional domestic asset protection trust is unavailable in Arizona. In addition, if you place assets in a hybrid DAPT, you lose the right to manage those assets. You are also not eligible to be a beneficiary of your own hybrid DAPT.

On the other hand, the most significant benefit of adding assets to a hybrid DAPT is that you are actively protecting your assets from creditors. Assets you place in a hybrid DAPT are generally shielded from seizure by current and future or unknown creditors. Suppose you place a hybrid DAPT in the hands of a reliable family member or trustee. In that case, you can feel confident your wishes will be respected and that your assets will stay out of reach from aggressive creditors. In establishing an irrevocable trust, you can dictate the future allocation of your assets to suit your unique needs.

Another angle to consider when contemplating the pros and cons of an irrevocable hybrid domestic asset protection trust is the possibility of new laws and future policy changes. Although Arizona does not permit self-settled trusts today, state policy could change in the years to come. That’s why placing your hybrid DAPT under the control of someone you trust is always a wise option. You should always choose a trustee you can rely on to add you as an eligible beneficiary to a trust if Arizona changes its laws on traditional DAPTs.

Depending on your financial situation, there might also be certain tax benefits or drawbacks to establishing a hybrid DAPT. A trusted West Valley Arizona estate planning attorney can help you understand your options and review specific tax implications to make the best choice for your estate.

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How Can I Decide Whether a Hybrid DAPT Is Right for Me?

To determine if diversifying your estate plan by adding a hybrid DAPT is a wise move, it helps to look at your current financial situation.

Are you worried about creditors? If so, first consider the value of your assets. Arizona has protections in place for those declaring bankruptcy in the state. The Arizona homestead exemption, for example, protects your primary residence during bankruptcy if you have no more than $150,000 in equity. Likewise, retirement and pension accounts like 401(k)s and IRAs are exempt during bankruptcy.

When considering whether an irrevocable hybrid DAPT is suitable for your estate, think about the following:

  • Is the amount of equity in your primary residence $150,000 or more?
  • What is the total value of your investment real estate holdings?
  • What is the value of your small business (if you have one)?
  • What is the full value of your financial investments that aren’t in retirement accounts?

If the combined value of these assets is more than $500,000, it might be a good idea to protect your assets with a hybrid DAPT.

There are numerous factors to consider, and planning your future can feel daunting and overwhelming. But a good estate planning and asset protection attorney can help you evaluate the big picture and guide you toward the best solutions.

At Pennington Law, PLLC, we always put you first. We aim to offer you the advice you need to make informed choices about your estate plan, whether or not that includes establishing a hybrid DAPT.

Contact a West Valley Arizona Hybrid Domestic Asset Protection Trusts Lawyer Today

When drafting an estate plan, your goal is to protect yourself and your family. At Pennington Law, PLLC, that’s our goal, too. When you come to us for help, you can count on us to take the time to listen to your concerns, answer your questions, and craft a solid estate plan that addresses your unique needs.

If creating a hybrid DAPT is the right option for you, we can help you identify a reliable, qualified trustee and draft trust documents that do precisely what you want them to. We also will give you specifics about DAPTs, such as whether there are drafting requirements or a waiting period.

Let our comprehensive Arizona estate planning legal team give you peace of mind. Contact our West Valley Arizona office to arrange a free, confidential consultation and discuss the possibility of adding a hybrid domestic asset protection trust to your estate plan.

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