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Connecticut Domestic Asset Protection Trusts (DAPT)

September 22, 2020 General

For many years, Connecticut residents that desired to establish trusts to protect their assets from creditors had to utilize the jurisdictions of Alaska, Delaware and others. These jurisdictions typically required a certain amount of assets to be kept in that State, and for at least one of the trustees to be located there as well. This typically added significant expense to establishing and administering a domestic asset protection trust. This all changed as of January 1, 2020, because Connecticut now permits the establishment of self-settled domestic asset protection trusts (DAPTs). Simply put, Connecticut now permits individuals to establish a trust that protects the individual’s assets from their creditors, and still benefit from the assets.

In order to enjoy creditor protection, the trust must satisfy certain requirements, including: 1. Being irrevocable; 2. Incorporate Connecticut law as to its validity and administration; 3. Contain a spendthrift clause; and 4. Use a “qualified trustee”. The first three requirements are easily addressed, but the “qualified trustee” requires greater consideration. A “qualified trustee” is either an individual residing in Connecticut or an entity authorized by Connecticut law to act as a trustee. In addition, this “qualified trustee” must maintain or arrange for the custody of the trust assets; attend to filing all tax returns; maintain records of the trust; and materially participate in the administration of the trust. Also, the trustee would not be the individual establishing the trust nor a related or subordinate party. However, the individual establishing the trust can reserve the power to remove and appoint trustees, provided such trustees are not related or subordinate parties.

There are some limits to the creditor protection. It is worth noting that certain claims can still be enforced against a DAPT, including: 1. Tort claims arising prior to the establishment of the trust; 2. Marital support obligations; 3. Fraudulent transfer claims; and 4. Child support obligations. Finally, claims are subject to a four year statute of limitations period.

Connecticut now offers an interesting opportunity for individuals concerned with creditor protection to establish trusts to protect themselves and their loved ones, while reserving certain beneficial enjoyment. When you consult with the attorneys of Brown, Paindiris & Scott, LLP for your estate planning needs, we can evaluate the usefulness of this technique.