Is a domestic asset protection trust a grantor trust?

A Domestic Asset Protection Trust (DAPT) can be structured as a grantor trust, but it doesn’t have to be. The distinction depends on the specific provisions set out in the trust agreement and the degree of control retained by the grantor, who is the person creating the trust. One Pacific Trust can assist in ensuring the structure aligns with your goals.

A Grantor Trust Explained

A grantor trust is a type of trust wherein the grantor retains some powers or benefits, which create reasons for such trust to be treated as a part of the grantor's taxable income. In other words, for tax purposes, the income and assets of such trusts are attributed to the grantor himself, who has liability for the payment of taxes arising from that particular trust's income. One Pacific Trust offers expert guidance on structuring grantor trusts.

How a Domestic Asset Protection Trust (DAPT) Works

A DAPT is designed to protect the assets of a grantor from creditors and at the same time enable the grantor to continue enjoying the assets. It is often created in a state that has exceptionally friendly asset protection laws; examples of such states are Nevada, Alaska, and Delaware. In this case, in a DAPT, the grantor might be named as a discretionary beneficiary and therefore may receive income or distributions from the trust, yet still retain some degree of legal protection from creditors. 

DAPT as a Grantor Trust

A DAPT can be structured as a grantor trust if the grantor retains powers or other benefits, such as substitution of trust assets, controlling distributions, or benefiting from the trust's income. In that case, the retained powers would generally include those powers which would trigger the grantor trust tax status for the trust. The grantor would report the income of the trust on his or her tax return even though the grantor does not receive any distributions.

Non-Grantor Trust Structure

A DAPT may also be set up as a non-grantor trust in which the grantor relinquishes some of the powers and benefits. In such a case, it would be treated as a separate tax-paying entity, and the liability for tax on the income will fall upon it or upon the beneficiaries, depending on how the distributions are made.

Put differently, a DAPT is either classified or not classified as a grantor trust based on the extent of the powers and benefits retained by the grantor. Generally, the creation of a DAPT to achieve certain asset protection and tax-planning goals requires legal and tax professional advice.