Could a Domestic Asset Protection Trust Be the Right Trust for You?

There are more ways to create wealth today than ever before. Whether you are working a traditional nine-to-five job and investing in the stock market, a full-time investor trading across international markets, running an online business, or a serial entrepreneur, the landscape of opportunity has never been broader—or more accessible.

But the threats to personal wealth have grown as well: economic instability, professional liability, divorce, lawsuits, and even cybercrime. The same online side hustle that supplements your income could expose you to a data breach claim. However you earn your money, long-term asset protection planning is key to keeping it.

One possible tool in that plan is the Domestic Asset Protection Trust (DAPT)—a type of irrevocable trust designed to protect your assets from future creditors. But if you live in Arizona, there’s a unique twist: Arizona only allows a limited or hybrid version of DAPT protection, and that distinction matters.

How DAPTs Work

DAPTs emerged in the late 1990s as a U.S.-based alternative to offshore trusts. Alaska was the first state to enact DAPT laws in 1997,¹ and today more than 20 states² have statutes allowing individuals to establish irrevocable self-settled trusts with built-in asset protection features.

In a typical DAPT setup:
- The grantor (you) transfers assets into an irrevocable trust
- An independent trustee—often located in a DAPT-friendly state—manages the trust
- The grantor is a discretionary beneficiary with no guaranteed right to receive distributions
- After a specified statutory period (usually 2–4 years), the assets may become unreachable by future creditors

However, Arizona does not allow full self-settled asset protection trusts like Nevada or Alaska. Arizona law does permit spendthrift clauses, and it offers limited protection through hybrid DAPTs.

Under A.R.S. § 14-10505(E)³, Arizona recognizes spendthrift provisions, which restrict a beneficiary’s creditors from reaching the trust assets—except when the beneficiary is also the trust’s settlor. In other words, if you create a trust for yourself in Arizona and retain the right to receive distributions, your creditors can likely still access those assets.

So what is allowed in Arizona? Arizona permits a hybrid approach: you create an irrevocable trust that does not name yourself as a current beneficiary, but gives another party—like an independent trustee or trust protector—the discretion to add you later. This extra layer may offer some creditor protection, but the courts have not yet tested it extensively.

Additionally, Arizona residents often choose to form a DAPT in another state, such as Nevada or South Dakota, but this strategy is not guaranteed to work. Courts in non-DAPT states (including Arizona) may apply their own public policy and disregard another state’s DAPT laws if the trust creator lives locally and most trust activity happens in a non-DAPT jurisdiction.

Let’s say Sarah, an Arizona business owner, wants to shield her personal wealth from possible future liability. She sets up an irrevocable DAPT under Nevada law, appoints a Nevada trustee, and funds the trust with investment assets.

As long as:
- She has no existing or reasonably anticipated creditor claims,
- The trustee has full discretion and is not under Sarah’s control,
- And she complies with Nevada's statutory requirements,
Sarah may be able to benefit from Nevada’s protections. But—if she is still living in Arizona and a claim is filed in Arizona courts, those courts may refuse to honor Nevada's DAPT protections, especially if the trust is deemed a sham or if the transfer appears fraudulent.

If, however, Sarah instead creates an Arizona irrevocable trust naming her children or spouse as current beneficiaries and does not retain direct access, the trust may be better protected from her creditors under Arizona’s spendthrift trust provisions.

Keep the following in mind:
- You cannot be both the settlor and a beneficiary of a protected trust under Arizona law without risking asset exposure.
- Timing matters: Assets transferred after a creditor claim arises may be clawed back.
- State law differences: Other states may not recognize Arizona's hybrid trust protections.
- Federal claims are exempt: Bankruptcy courts, the IRS, and child support claims can pierce through most asset protection trusts.
- Control undermines protection: The more influence you exert over the trust, the less protection it provides.

You may benefit from an Arizona-based hybrid DAPT or another asset protection trust strategy if:
- You have substantial personal or professional liability exposure
- You are a public figure or high-net-worth individual
- You work in a lawsuit-prone profession (e.g., medicine, law, real estate)
- You want to protect inheritance for children from divorce or creditors
- You’re not reliant on the trust assets for current income

Because of its limitations, a DAPT should be part of a comprehensive asset protection plan, which may include:
- Homestead declarations
- Retirement account maximization
- Liability insurance
- Business entity structuring (e.g., LLCs, FLPs)
- Spousal Lifetime Access Trusts (SLATs)
- Irrevocable Life Insurance Trusts (ILITs)

While Arizona does not allow full-blown DAPTs, strategic alternatives exist. If you’re considering asset protection in Arizona, it’s important to work with a knowledgeable estate planning attorney who can help you assess the risks, understand the legal limitations, and structure a trust aligned with both your goals and the law.

If you’d like to explore how an irrevocable trust or other asset protection strategy could work for your unique situation, schedule a consultation with Obsidian Ridge Law today at obsidianridgelaw.com or call us to get started.

1. Alexander A. Bove, Jr,.ed., Domestic Asset Protection Trusts: A Practice and Resource Manual, ABA, https://www.americanbar.org/products/inv/book/415567501.
2.  Brandon Roe, What’s the Best State for a Domestic Asset Protection Trust?, Nestmann (Apr. 28, 2025), https://www.nestmann.com/domestic-asset-protection-trust-states. 
3. Ariz. Rev. Stat. § 14-10505(E), available at https://www.azleg.gov/ars/14/10505.htm