In 2009, New Hampshire joined what was then a small group of states that legally allowed the creation of a domestic asset protection trust (“DAPT”). Although today, 20 states in the US allow the use of DAPTs, not all DAPTs and jurisdictions are created equal. New Hampshire has become one of the most progressive states among the group to allow DAPT and, as a result, a potentially attractive jurisdiction for counselors to use.
What is a DAPT?
A DAPT is a specific type of irrevocable trust that holds the assets transferred to it by the grantor and protects those assets from the grantor's future creditors. While other types of structures can provide similar protections, the DAPT uniquely allows the grantor to remain a beneficiary of the trust. As a result, the grantor has access to or enjoys the benefits of the trust assets. Additionally, the grantor is permitted to retain some level of involvement in the administration of the trust assets.
What are the DAPT requirements?
To establish a DAPT in New Hampshire, the trust must have at least one trustee who is either a New Hampshire resident or a chartered bank or trust company with a place of business in New Hampshire. Additionally, the trust must adopt New Hampshire as its governing law and the grantor's interest must be subject to a spendthrift provision. Finally, the concessionaire must remain solvent after the transfer of assets to DAPT to avoid a fraudulent transfer.
What assets can DAPT hold?
There are no restrictions on what assets can be transferred and held in DAPT, making it an optimal holding tool for personalized planning. The grantor may include liquid assets, such as securities, or even cash and non-liquid assets, such as closely held business interests and intellectual property. In addition, business entities such as limited liability companies, partnerships and corporations can be used in conjunction with DAPT to create multi-layered and compartmentalized risk mitigation.
What control can the grantor retain?
When transferring assets to DAPT, the concessionaire must relinquish most, but not necessarily all, control over the assets. Certain powers may be retained, such as veto authority over distributions to other beneficiaries of the trust, removal and replacement of a trustee with another independent trustee, and a limited power of appointment to direct how governs trust assets and who can benefit from them after the grantor's death.
Who would be a good candidate for a DAPT?
A DAPT can appeal to any individual who is concerned about the future risk of creditors, such as those involved in high-risk industries such as construction, medicine, dentistry, transport, law and lending or those involved with high risk assets such as rental properties. , chemicals and pollutants.
Can DAPT be multipurpose?
In addition to creditor protection benefits, a DAPT can serve multiple purposes if properly drafted. For example, a DAPT can be designed to provide protection to creditors of trust beneficiaries other than the grantor or be used as a multi-generational estate planning structure, or both. Further, in some jurisdictions, DAPT may be used to minimize state and/or federal income and/or estate taxes. The availability of additional benefits, beyond creditor protection, will depend on the grantor's domicile, the trust instrument itself and the assets contributed.
What are the limitations of creditor protection?
While the DAPT may provide important protections, the New Hampshire statute, like all others that recognize the DAPT, provides exceptions for which the protections may be disregarded. First, New Hampshire requires a four-year waiting period after transferring assets to the trust before achieving full creditor protection for such assets. Second, to reach assets transferred by a grantor to a DAPT, an actual creditor of the grantor must file a claim within one year after the creditor knew or reasonably should have known that the grantor transferred the assets to the DAPT. Third, New Hampshire statutorily allows certain judgments to attach to DAPT assets regardless of the date of transfer. These judgments are for (1) child support, (2) alimony, (3) creditors who have provided services to protect a beneficiary's interest in the trust, and (4) claims made by a state or federal government.
Just as all DAPT jurisdictions are not the same, neither are all donor needs the same. It is important to discuss individual goals and needs regarding setting up a DAPT with an attorney who is well versed in local asset protection laws. It's just as important to work with a trusted New Hampshire trustee who has expertise and skills that match your needs.
Nadi Son, JD, LLMis Vice President at New England Fiduciary Trusta New Hampshire trust company.