California estate planning often involves high-net-worth individuals, business owners, and professionals seeking ways to protect assets from future creditors while retaining some ability to benefit from those assets. One frequently discussed option is the Domestic Asset Protection Trust (DAPT), also known as a self-settled spendthrift trust.
California does not authorize DAPTs. Under California Probate Code § 15304, if the person who creates the trust (the settlor) is also a beneficiary, creditors can generally reach the maximum amount the trustee could distribute to that settlor. As a result, some California residents explore forming a DAPT in a state that does permit them, such as Nevada or Tennessee. This article provides an overview of what a DAPT is, a comparison of Nevada and Tennessee law, insights from leading expert Steve Oshins’ annual rankings, and the real-world considerations for California residents.
A DAPT is an irrevocable trust created under the laws of one of the approximately 19 states that have enacted specific statutes allowing the settlor to remain a discretionary beneficiary. In a traditional irrevocable trust, the settlor cannot benefit if creditor protection is the goal. DAPT legislation changes that rule in the enacting state.
Typical features include:
DAPTs are designed primarily to protect against future creditors. They do not shield assets from known or imminent claims, and all transfers remain subject to fraudulent-transfer laws. Most DAPTs are structured as grantor trusts for income-tax purposes (the settlor pays the taxes), and they require ongoing administration, professional trustees, and careful timing.
Nevada and Tennessee both allow DAPTs, but their statutes differ significantly. Steve Oshins, a Nevada-based attorney widely recognized as a leading authority on asset-protection trusts, publishes an annual “Domestic Asset Protection Trust State Rankings Chart” that evaluates the statutes based on weighted factors including:
In Oshins’ DAPT State Rankings Chart, Nevada ranks #1 with a score of 99 out of 100. Tennessee ties for #6 with a score of 83.5.
Nevada (Nevada Asset Protection Trust)
Tennessee (Tennessee Investment Services Trust)
Key Takeaways from Oshins’ Analysis. Nevada’s top ranking stems from its short waiting period, complete lack of exception creditors, and overall ease of use. Tennessee offers a competitive short waiting period but loses points due to its family-law exceptions and a slightly lower overall score. Both states are among the stronger domestic options, but Nevada is consistently viewed as the gold standard in expert rankings.
Creating and maintaining a DAPT involves substantial considerations:
These trusts function best when the trustee, administration, and potential litigation are centered in the DAPT state.
California residents face a clear conflict-of-laws issue. If a creditor sues in California, a California court is likely to apply California law and its public-policy prohibition on self-settled spendthrift trusts. California’s Uniform Voidable Transactions Act also contains a choice-of-law provision that looks to the debtor’s residence.
Steve Oshins, however, takes a more optimistic view in his writings and client materials. He notes that the settlor does not need to reside in a DAPT state. After more than 25 years of DAPT legislation, Oshins observes that no non-bankruptcy creditor has successfully challenged a properly structured DAPT all the way through the courts solely on the ground that the settlor was a non-resident and that the judge therefore applied the non-DAPT state’s law instead of the DAPT state’s protective statute.
He cites cases such as:
Oshins also highlights cases in which DAPT states (e.g., South Dakota) refused to enforce out-of-state family-support orders against their trusts. He frequently recommends Hybrid DAPTs for non-residents: the trust starts as a third-party trust (settlor is not initially a beneficiary) and can later be converted to a full DAPT once the waiting period passes or circumstances change. This structure can reduce fraudulent-transfer risk and address some choice-of-law concerns.
Balanced Perspective for California Residents. While Oshins’ analysis and the absence of adverse final rulings are encouraging, the protection remains untested in many scenarios. If a California creditor obtains a judgment in a California court and attempts to enforce it against a Nevada or Tennessee trustee, the outcome is uncertain. The DAPT state’s courts may refuse to honor the California judgment, but the creditor could still pursue collection in California against any California-situs assets or attempt to argue that California law governs the transfer itself.
Fraudulent-transfer claims (state or federal bankruptcy) remain a separate risk regardless of where the trust is sited. California’s recent amendments to its voidable-transactions law have strengthened creditors’ positions in some respects.
In short, a properly structured Nevada DAPT (or Hybrid DAPT) may create significant negotiation leverage, force creditors to litigate in a favorable forum, and provide real protection in the right circumstances. It is not, however, a guaranteed or ironclad shield for California residents. The protection is stronger when the trustee, administration, and assets have a genuine connection to the DAPT state and when the settlor has no known creditors at the time of funding.
For most California families, estate-planning attorneys emphasize tools that are fully respected by California courts:
These strategies are simpler, less expensive, and far less likely to be challenged.
According to Steve Oshins’ widely referenced annual rankings, Nevada offers the strongest DAPT legislation in the country, followed closely by a handful of other states; Tennessee provides a solid but more limited option due to its family-law exceptions. Oshins maintains that DAPTs (including Hybrid versions) can be effective even in non-DAPT states such as California, citing more than two decades without a single non-bankruptcy case in which a creditor successfully pierced a DAPT solely on choice-of-law grounds.
Nevertheless, California courts apply their own strong public-policy rules against self-settled trusts. For the typical California resident, a DAPT remains an advanced, higher-cost tool with meaningful but not absolute protection. It may be appropriate as one layer in a sophisticated plan for individuals in high-risk professions or with significant exposure, but it is rarely the simplest or most reliable first choice.
This article is for educational purposes only and does not constitute legal advice.
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