Historically, the only way to receive asset protection benefits from a trust was if someone else established an irrevocable trust for your benefit. This is known as a third-party settled trust. While the advent of the Domestic Asset Protection Trusts has changed the Asset Protection Trust industry, third-party settled trusts are traditionally superior to DAPTs. As a result, lawyers created the Hybrid Domestic Asset Protection Trust (“Hybrid DAPT”), so clients could have the tried and true reliability of a third-party settled irrevocable trust, while also having the flexibility of a modern DAPT.
In a Hybrid DAPT, you create a third-party settled trust for the benefit of your spouse and descendants (or other beneficiaries). Trust assets may be accessed by your spouse, descendants, or other beneficiaries through a distribution from the trust. You have created a third-party trust with significantly more asset protection than a traditional DAPT. If necessary, the trustee or trust protector can create a subtrust from the original trust you established, and move assets from the original trust to the subtrust for your benefit. This allows for a backdoor strategy in case you are no longer able to access assets from your spouse, descendants, or other beneficiaries. Once the subtrust is created, you end up with a traditional Domestic Asset Protection Trust.
Choose a Strong Domestic Asset Protection Trust Jurisdiction
A Hybrid Domestic Asset Protection Trust must be established in one of the states with the most protective Domestic Asset Protection Trust statutes.
Typically, the settlor names a trust company in that state as a co-trustee unless the settlor knows a resident of that state that the settlor trusts. The trust company generally acts as the distribution trustee and the settlor generally acts as the investment trustee, although alternative structures can be used. The settlor generally retains the power to fire and hire trustees, so the choice of trustee is not set in stone.
Choice of Law
South Dakota is routinely recognized as the best trust jurisdiction in the United States. One of the reasons for this is South Dakota’s premier Domestic Asset Protection Trust statutes . Other popular jurisdictions are Nevada, Tennessee, Delaware, and Alaska. However, South Dakota’s robust, comprehensive and modern trust laws set above the other DAPT jurisdictions.