A Domestic Asset Protection Trust (DAPT) is a useful tool for California real estate investors who want to shield their assets, but it’s important to note that the state of California does not recognize DAPTs. This raises the question: How can you utilize a DAPT to protect your California real estate portfolio? The answer lies in leveraging the laws of states that do permit DAPTs, allowing you to create a structure that protects your real estate assets from potential creditors and litigation.
Establishing a Domestic Asset Protection Trust Through a Limited Liability Company
As a reminder, a DAPT is a self-settled irrevocable trust, meaning assets (such as real estate) are no longer formally owned by you,. The most tremendous benefit comes if you are personally sued. While holding California real estate in an LLC formed in another state, such as Wyoming, is beneficial for asset protection purposes, there is no guarantee a judge will respect the reverse piercing protections of these LLCs, and your real estate within the DAPT could still be at risk. If the LLC that holds your California real estate is owned by a DAPT, the protection is almost guaranteed (with some exceptions, as always). Of course, a DAPT will shield you from potential litigation arising at a rental property or other properties held within the DAPT, also known as piercing the corporate veil.
Because California does not recognize these, you would need to establish them in one of the following states that do: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
The steps to do so involve establishing an LLC in one of the above states that allows DAPTs and then transferring the LLC into the DAPT formed in that same state. Using an LLC for ownership of California real estate investments is a common decision to separate property owners from the actual operations and risks associated with holding an extensive portfolio.
This shields you from future creditors, litigation, and other financial issues that you would otherwise be exposed to if you did not establish a DAPT for your California properties. However, doing this may not shield you from known creditors you currently have. If you owe debts, you cannot transfer assets into irrevocable trusts to the point where you would no longer be able to satisfy those debts.
Establish an Out-of-State Domestic Asset Protection Trust
At Dahl Law Group, we have extensive experience in helping California real estate investors protect their properties and their businesses through various legal strategies, including DAPTs. We will work with you to explore all available options to protect your investments, and a DAPT may be your best solution. Contact Dahl Law Group today at our Sacramento or San Diego office to get started on creating a plan that protects your assets and secures your financial future.
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