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Horizon Elder Law & Estate Planning Blog

Wednesday, March 24, 2021

Understanding Domestic Asset Protection Trusts

Living in an especially litigious culture, Californians are increasingly concerned about asset vulnerability to legal judgments and creditors.

Many have been advised that placing assets in a trust protects their wealth. While in some contexts that is true, the general notion of forming a trust in California to shelter assets from creditors is a false pretense.

California estate planning attorneys advise that understanding domestic asset protection trusts is critical to avoid missteps that could leave you open to economic loss and legal scrutiny.

What is a Domestic Asset Protection Trust?

A domestic asset protection trust is an estate planning tool that shelters one's assets from creditors while allowing those assets to remain in the United States.

Years ago, the only way to protect assets against judgments or creditors was to shelter them in off-shore foreign asset protection trusts (FAPTs). This option was available to the elite wealthy, who had the money and connections to make such arrangements.

However, after U.S.courts applied American law to the assets held in FAPTs), the protections and appeal of off-shore trusts lessened.

The first domestic asset protection trust was established in 1997, offering a direct means of protecting assets from creditors. Originating in Alaska, DAPTs are valid in at least 12 states with a rapidly expanding appeal.

With so few states passing legislation allowing for the creation of DAPTs, it's vital you consult an estate planning attorney about the rules in your state.

Does California Recognize DAPTs?

Unfortunately, California does not allow for the creation of domestic asset protection trusts. And, while it may seem enticing to establish DAPT in another state and transfer your assets out of California, California estate planning attorneys caution against doing so:

  • Most DAPT states require the person creating the trust to be a resident in the state where the DAPT is established.
  • Two sections of the California Penal Code make it a criminal offense to transfer assets to other states for purposes of evading creditors (CA Penal Code § 154 and 155).

Penalties for Establishing a DAPT Outside of California

If you are a California resident and plan on establishing a DAPT in another state for purposes of sheltering your assets, you not only risk your wealth but potential criminal sanctions as well:

  • Your assets will not be protected
  • You may be subject to a felony conviction, fines, and possible jail time

If you reside in California and are concerned about asset protection, don’t risk your assets and criminal conviction by trying to get around California law.

How Can You Protect Your Assets in California?

There are ways to protect your assets in California, but they require the expertise and guidance of a qualified estate planning attorney. Depending on your unique circumstances, some limited, third party protections may available under various trust structures:

  • Medicaid Trusts
  • Spendthrift Trusts
  • Discretionary Trusts
  • Support Trusts
  • Bridge Trusts

Additional asset protection strategies allowable under California law include:

  • Retirement investment plans
  • Liability insurance
  • Corporations and Limited Liability Corporations

Contact an Estate Planning Attorney Today

Taking a proactive approach to estate planning is the best strategy for asset protection and legacy building.

While some states may afford more comprehensive protections than California, some options allow Californians to safeguard assets.

Contact our office today to speak with an experienced California estate planning attorney about protecting your wealth and fulfilling your legacy objectives.


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