Domestic Asset Protection Trusts

Feb 1, 2019

Domestic Asset Protection Trusts are spreading to more jurisdictions. However, their protections may be waning. Read on to learn more about Domestic Asset Protection Trusts.

Compliments of our firm

By:  Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.

Seventeen states now allow for self-settled Domestic Asset Protection Trusts (“DAPTs”). Those states are Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.

What is a DAPT?

  1. The trust is domestic rather than international. In other words, it’s set up in the United States. There are offshore asset protection trusts, which have their own set of issues. But domestic trusts cost less to set up and administer and are not subject to the political and other risks of offshore jurisdictions.
  2. The trust doesn’t allow the beneficiary to assign their interest in the trust to someone else. In other words, it includes a “spendthrift” clause which allows for asset protection.
  3. The trust doesn’t provide a standard which allows a creditor to force the trustee to make a distribution to them. In other words, the trust is typically completely discretionary. A trust with an ascertainable standard, like a trust with a distribution standard like “health, education, maintenance, and support” would allow a creditor (standing in the shoes of the beneficiary) to force the trustee to make distributions falling within that standard.
  4. The trust is self-settled. In other words, the assets going into the trust came from one of the permissible beneficiaries of the trust. In most states, such a trust can be pierced by a creditor of the grantor/beneficiary, i.e., the person setting up the trust. However, in the seventeen DAPT states listed above, the creditors cannot do so, as long as the rules have been followed.

Each state has its own rules. Typically, in order to obtain the protections of the state law, the trust must be administered in the state by a trustee who is a resident of the state or by a corporate fiduciary in that state. The transfer into the trust must not be a fraudulent transfer. However, typically the DAPT states have statutes which make it more difficult to show a transfer was a fraudulent transfer.

However, if another state gets jurisdiction over the DAPT or its assets it could apply its own law and pierce the protections of the DAPT. An example of this would be a DAPT trust owning land in a non-DAPT state. In that situation, a court in the non-DAPT state where the land is situated could get in rem jurisdiction over the asset and satisfy a judgment by seizing the property.

If another jurisdiction issues a valid judgment, in theory the DAPT state must give that judgment full faith and credit, due to the U.S. Constitution. However, the ins and outs of this issue as applied to DAPTs have not been fully resolved yet by the U.S. Supreme Court.

DAPTs have been spreading to more jurisdictions and are more common. However, recent legal cases, like Toni 1 Trust v. Wacker, 413 P.3d 1199 (Alaska, March 2, 2018), have been chipping away at the protections of the DAPT. In Toni 1 Trust, the court refused to apply an Alaska statute (AS 34.40.110(k)) which provided exclusive jurisdiction to Alaska courts over fraudulent transfer claims against Alaska DAPTs. In Toni 1 Trust, the Alaska court refused to set aside a judgment from a Montana court on the theory the Montana court didn’t have jurisdiction due to the Alaska statute.

While DAPTs provide protections, one should also consider other ways to protect assets against the claims of creditors, such as insurance and statutory protections like retirement plans.

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