Cryptocurrency investors and those who conduct business in the blockchain environment have unique concerns that are not adequately addressed by conventional banking, estate planning, and wealth management products. Two of the most common desires are privacy and access. By creating a domestic asset protection trust, you can maintain access and control over your crypto assets while structuring the trust in such a way that prevents creditors from coming after them in the event you file for bankruptcy, go through a divorce, or have a judgment against you.
However, like most complex wealth management strategies, asset protection trusts are complex. If a DAPT is not properly set up, it will give you the false sense that your assets are protected when, in fact, they may not be. Unfortunately, by the time you realize there was a mistake in how your DAPT was structured, it may be too late. Additionally, there are strict processes that must be followed to create a DAPT, including restrictions on incoming assets. Thus, it is essential that you work with an experienced cryptocurrency investor lawyer when considering whether a DAPT is right for you.
What Is a Domestic Asset Protection Trust?
An asset protection trust (“APT”) is a special type of trust that provides exceptionally strong protection from creditors, lawsuits, as well as any other type of judgment. When properly structured, assets placed in the trust are beyond the reach of most types of creditors. One of the most important aspects of an asset protection trust is that the creator of the trust can name themselves as the sole beneficiary of the trust. This allows you to create a trust, transfer assets into the trust, and dictate how those assets are invested and used.
Broadly speaking, there are two types of asset protection trusts, domestic asset protection trusts (“DAPTs”) and foreign asset protection trusts (“FAPTs”). The obvious difference between DAPTs and FAPTs is that DAPTs are created in the United States, and FAPTs are created abroad. Thus, DAPTs are subject to U.S. laws, while FAPTs are not. There are currently 17 states that allow the creation of DAPTs: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
Below are 6 things to consider when creating a domestic asset protection trust.
DAPTs Must Be Created as Irrevocable Trusts, but Not in the Traditional Sense
Trusts come in two twos: revocable and irrevocable. Revocable trusts offer the most flexibility; however, in turn, they also confer limited benefits. On the other hand, irrevocable trusts cannot be modified or terminated by the grantor but offer the most asset protection benefits. DAPTs are unique, however, because they allow you to both create the trust and serve as a beneficiary. Thus, if you later decide to amend the trust or shut it down entirely, you can do so.
You Cannot Serve as the Trustees—But You Can Provide Direction
One of the hallmark traits of a domestic asset protection trust is that because the creator serves as the beneficiary, they cannot also serve as the trustee. Thus, all investment and disbursement decisions are left up to the trustee. While this would seem to raise concern among crypto investors who do not want someone else making crucial buy/sell decisions on their behalf, it’s not as big of a downside as it appears. This is because, as the creator of the trust, you can choose the trustee and provide detailed directions about how trust assets are invested and when disbursements must be approved. Additionally, you can name yourself as the trust’s investment advisor, essentially requiring the trustee to defer to you for all investment decisions. Finally, you can replace the trustee at any time.
You Typically Need to Have a Registered Agent in the State Where the Trust Is Located
One of the lesser-known requirements of a domestic asset protection trust is that anyone who does not live in the state where the trust was set up must name a registered agent for the trust. Each state’s law is different in terms of the registered-agent requirement. For example, in Wyoming, a registered agent must have a Wyoming address, is required to be physically present at this address during business hours, and is the party who will be served in the event the trust is named as a defendant in a lawsuit. An experienced cryptocurrency and blockchain lawyer can help you determine which state has the most favorable laws that will enable you to accomplish your goals.
Asset-Protection May Take Time to Kick In
If you are looking for a safe place to stash your cryptocurrency, it is very likely that time is of the essence. Thus, it is essential to understand when the trust starts to protect your assets. As a preliminary matter, only assets transferred into the trust enjoy any sort of protection. Thus, it is critical to work with an experienced cryptocurrency investor lawyer who can facilitate an effective transfer. Additionally, there is generally a two-year waiting period before the assets are eligible for protection. Depending on the laws of the state where you create the trust, you may be able to shorten this period by providing notice to creditors that you are transferring assets into the trust.
A Domestic Asset Protection Trust Does Not Provide Absolute Protection
While domestic asset protection trusts can shield your cryptocurrency from most creditors in most situations, there are certain situations where creditors may be able to “pierce” the trust and access the assets contained therein. The exact limitations of a DAPT will depend on the laws in the state where the trust was created. For example, in Wyoming, child support orders may remain enforceable against trust assets. Additionally, if the assets transferred into a domestic asset protection trust were used as collateral to obtain credit, the creditor may be able to seize those specific assets in the event of a default. Finally, assets placed into the trust in violation of the Uniform Fraudulent Conveyance Act or those that are transferred in an attempt to defraud are not generally protected.
You Do Not Need to Live in a State that Allows for DAPTs to Create One
Currently, there are only 17 states that permit the creation of domestic asset protection trusts. However, that doesn’t mean that if you live in one of the 33 other states, you are unable to open a DAPT. The laws governing the creation of DAPTs look to the location of the assets rather than the location of their owner. Thus, by transferring assets into a state that allows DAPTs, you can open a DAPT in that state. However, there is risk in opening an out-of-state DAPT. For example, say you live in Arizona and open a Wyoming DAPT. If you are sued in Nevada, the judge overseeing the case will need to determine which state’s laws apply to the case. If the judge finds that Wyoming law applies, chances are that the trust assets are beyond the reach of the other party. However, if the judge determines Arizona law applies, then the Wyoming DAPT may not provide protection at all. Regardless, the fact that there is inherent uncertainty from the perspective of a potential litigant not only deters them from filing suit but also can create favorable settlement conditions because the prospective litigant may not want to go through the expense of a lawsuit only to learn that you are essentially judgment-proof.
Frequently Asked Questions:
Can a Domestic Asset Protection Trust Protect Cryptocurrency Investments from Creditors?
Yes, a domestic asset protection trust may protect bitcoin, Ethereum, and other cryptocurrency investments from creditors by placing them beyond their reach in the event of a lawsuit, bankruptcy or divorce. However, protection is not absolute, and a trust must be properly structured and funded before any trust assets are protected. Additionally, there may be a waiting period from the date of transfer before the protection kicks in. Domestic asset protection trusts are unique in the protection they provide; however, they are also complex and highly regulated. Thus, it is essential to work with an experienced blockchain lawyer when creating and funding a domestic asset protection trust.
Do You Need to Live in a State that Allows for DAPTs to Open a Domestic Asset Protection Trust?
No, you can open a domestic asset protection trust in a state that permits them, regardless of where you live. This enables residents of any state to benefit from the protection these unique tools provide. However, it is imperative those who live in non-DAPT states work with an experienced bitcoin and cryptocurrency lawyer to ensure the trust is properly structured to maximize the protection it affords.
Do Domestic Asset Protection Trusts Offer Complete Protection from Creditors?
No, while the protections offered by a domestic asset protection trust are strong, they are not infallible, and there are exceptions in which a creditor or other third party can reach trust assets after obtaining a judgment. However, every state’s laws differ slightly on the circumstances in which creditors can pierce through a DAPT’s protections. For example, a Wyoming asset protection trust will not protect cryptocurrency investments in the following situations:
- You have outstanding child support obligations in Wyoming or any other state;
- The assets you transferred into the trust were pledged as collateral to secure credit;
- You transferred assets into a Wyoming asset protection trust in violation of the Uniform Fraudulent Conveyance Act; and
- You transferred assets into the account with the intent to defraud another person or entity.
However, when properly structured, most of these exceptions will not apply. Further, by understanding the limitations of a DAPT, you can better structure your other asset protection products to provide additional protection. At Oberheiden, P.C., our dedicated team of cryptocurrency and blockchain lawyers effectively advise investors on the proper structure of Wyoming asset protection trusts to ensure they provide the benefits they are intended to.
Contact the Blockchain and Cryptocurrency Lawyers at Oberheiden, P.C. to Learn More About How a Domestic Asset Protection Trust Can Protect Your Investments
At Oberheiden, P.C., our blockchain and cryptocurrency lawyers have been at the forefront of this new and developing area of law for years. Before joining Oberheiden, P.C., many of our lawyers had decades of experience working for the federal government in various legal and regulatory positions. This provides Oberheiden, P.C. with an unrivaled knowledge of the laws governing domestic asset protection trusts, as well as how courts interpret these laws. Our cryptocurrency investor lawyers are immediately available to schedule a free consultation to discuss your needs and determine an effective plan for protecting your investments. To learn more, and to schedule a free consultation today, reach out to Oberheiden, P.C. through our secure, confidential online contact form.
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