At the end of the 2023 legislative session, Arkansas became the twenty-first state to allow self-settled Domestic Asset Protection Trusts (DAPTs) and “decanting” of Trust property from one irrevocable Trust to another. These laws make Arkansas one of the more favorable states in the country in which to set up an Irrevocable Living Trust, but not everyone needs the kinds of protections the new law allows. We explain what these changes mean to Arkansans and others looking for certain Asset Protection tools.
What Do These Changes Mean?
Most U.S. states allow for spendthrift Trusts, which are designed to protect the assets in the Trust from irresponsible use by the beneficiary. When a Trust has a spendthrift provision, the assets are managed by a Trustee on behalf of the beneficiary and are safe from the beneficiary’s creditors or bankruptcy filings. The Trustee can use their discretion to disburse money to the beneficiary to prevent the beneficiary from squandering the funds. Spendthrift provisions can also be used for beneficiaries who are children or who are particularly vulnerable to fraud or lawsuits. However, the person who sets up the spendthrift Trust cannot name themselves as a beneficiary in order to protect assets from creditors or lawsuits. In other words, the Trust cannot be “self-settled.”
Thanks to the new laws in Arkansas, it is now possible to create a self-settled Domestic Asset Protection Trust for your own benefit. It is an Irrevocable Trust, which means the terms can never be changed, but once you transfer assets into the Trust and wait out the initial two-year statute of limitations, the assets will be protected from predators and creditors during your lifetime.
Under the new decanting law, a Trustee can avoid restrictive provisions on an existing Irrevocable Trust by “pouring” the assets into a new Trust with more favorable provisions. In order to prevent Trust settlors from intentionally hiding money and evading creditors, many additional rules and restrictions apply to these new Domestic Asset Protection Trusts. For example, you must appoint an independent Trustee, and you will need their approval to withdraw funds from the Trust. DAPTs are restrictive and costly to set up, but they provide valuable advantages in certain specific situations.
Who Might Consider a Domestic Asset Protection Trust in Arkansas
If you fall into any of the categories listed below, the Asset Protection attorneys at Ross & Shoalmire in Magnolia and Hot Springs can discuss the pros and cons of these new Trusts with you to determine if you should take advantage of a DAPT in Arkansas.
- You are at risk of lawsuits. If you are in a profession or business where there is a heightened risk of lawsuits, such as health care, law, or real estate investing, a DAPT can provide an additional layer of protection for your personal assets.
- You have a high net worth. Individuals with substantial assets are more likely to be targeted by creditors or litigants seeking substantial claims. A DAPT can help protect those assets from potential loss.
- You are concerned about future liabilities. If you have concerns about potential future liabilities, including those related to business ventures or investments, a DAPT can offer a safety net for your assets.
- You have the potential for estate tax liability. If you have specific estate planning goals, such as passing assets to your heirs with reduced estate tax liability, a DAPT can be a valuable tool in your overall estate plan.
- You reside in or have property in Arkansas. In order to take advantage of these new laws, you must live in Arkansas yourself, appoint a Trustee who lives in Arkansas, or put Arkansas real property into the Trust. The purpose of these laws is to keep investments in Arkansas by making asset protection more attractive, so it makes sense that there must be an Arkansas connection.
While the new laws are advantageous for Asset Protection, they are not right for everyone. We would be happy to explain these laws and discuss your options in more detail in one of our Arkansas law offices.