Asset Protection

A DAPT is a self-settled spendthrift trust — meaning the grantor is also a permissible beneficiary, yet the trust assets are generally shielded from the grantor's creditors. Currently 19 states permit DAPTs, with varying seasoning periods (the time after transfer before creditor protection attaches). Top DAPT jurisdictions: Nevada (2-year seasoning, no exception creditors beyond child support and pre-existing tort claims), South Dakota (2-year seasoning, strong statutory protections), Delaware (4-year seasoning, established case law), Alaska (original DAPT state, 10-year bankruptcy lookback).

• 19 states now permit self-settled asset protection trusts
• Nevada and South Dakota have shortest seasoning periods (2 years)
• Transfers must not be fraudulent conveyances (solvent at time of transfer)
• Federal bankruptcy lookback is 10 years for self-settled trusts (11 U.S.C. §548(e))
• DAPTs work best when established before any claim or threat of claim exists
• Not all courts in non-DAPT states will recognize DAPT protections

FLPs and family LLCs serve dual purposes: asset protection through charging order protection, and estate tax reduction through valuation discounts. The general/managing partner (or manager in an LLC) retains control, while limited partnership interests or non-managing member interests are gifted or sold to family members or trusts. Charging order protection means a creditor of a limited partner/member can only obtain an economic interest (right to distributions if and when made) — they cannot seize underlying assets or force distributions. Many states provide this as the exclusive remedy.

• Charging order protection is exclusive remedy in many states (NV, DE, SD, WY)
• Valuation discounts of 15-40% commonly applied for lack of control and marketability
• Must have legitimate business purpose beyond tax savings (Bongard, 124 T.C. 95)
• Must not commingle personal and entity assets
• Annual formalities (meetings, K-1s, capital accounts) must be maintained
• IRS has increased scrutiny — deathbed FLPs are particularly vulnerable

Physicians, surgeons, real estate developers, and business owners face elevated liability exposure. A comprehensive asset protection plan typically includes: professional liability insurance (first line of defense), properly structured entity ownership, retirement accounts (ERISA-qualified plans have unlimited federal protection), homestead exemptions (state-dependent), and irrevocable trusts for excess assets. Timing is everything — asset protection planning must be done before any claim or foreseeable claim exists. Transfers made after a claim arises are fraudulent conveyances under the Uniform Voidable Transactions Act (UVTA).

• Professional liability insurance is always the first line of defense
• ERISA-qualified plans (401k, pension) have unlimited federal creditor protection
• IRAs protected up to ~$1.5M in bankruptcy (inflation-adjusted)
• Homestead exemptions vary: FL/TX unlimited, others capped
• Tenancy by the entirety protects jointly-held property from individual creditors (in ~25 states)
• All planning must precede claims — Uniform Voidable Transactions Act (UVTA)

Umbrella liability insurance provides an additional layer of protection above underlying auto, home, and professional policies. For UHNW individuals, $5-10M in umbrella coverage is common, with some carriers offering $25M+ for high-net-worth clients. Directors and Officers (D&O) insurance protects against personal liability from board service. Employment practices liability insurance (EPLI) covers employment-related claims. Fiduciary liability insurance protects trustee decisions. The insurance layer should be calibrated to the individual's specific risk profile.

• $5-10M umbrella coverage typical for UHNW individuals
• Cost is relatively modest: ~$300-500/year per $1M of coverage
• D&O insurance essential for anyone serving on corporate boards
• Insurance is the first, not last, line of defense
• Some carriers specialize in UHNW coverage with higher limits
• Review annually and after significant life/asset changes