Domestic Asset Protection Trusts

November 14, 2013. Earlier this year, Ohio became the fourteenth state to permit domestic asset protection trusts, or DAPTs, through the Ohio Legacy Trust Act which became effective March 27, 2013. The other 13 states would be Alaska, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, and Wyoming. There is also some small debate whether Colorado should properly be included in this list.

The appeal of DAPTs for estate planning purposes is it permits the creation of a trust where a trustee has absolute discretion to make distributions to a class of beneficiaries that includes the settlor/grantor. Structured as such, and barring fraud, the trust allows an individual to isolate their assets from creditor’s without completely alienating the benefits of those assets. This becomes particularly attractive in jurisdictions such as South Dakota, where a trust can continue on perpetually and a state income tax is not levied on the trust. South Dakota is also more advantaged than other states except Nevada in the time it takes from the creation of the trust until the time it becomes secure from creditors.

There are, of course, some qualifications. There are certain types of creditors that can still get to the assets of the trust. These are defined by statute. Using South Dakota as an example, the creditors capable of reaching through the trust would be those to whom alimony and child support was owed, as well as divorcing spouses.

With more states enacting DAPT statutes and awareness growing, the question of whether a DAPT will work for a non-resident becomes more pertinent. There is no clear guidance on the issue, but a recent decision in a bankruptcy court in Washington may at least hint at what doesn’t work. In re Huber, 2013 WL 2154218 (Bkrtcy. W.D. Wash. May 17, 2013), a DAPT was insufficient where a Washington resident set up the trust under Alaska statute in the shadow of a looming bankruptcy and substantial uncertainty of being able to fulfill his obligations to creditors. Furthermore, of the trust property, most remained in the State of Washington. Only a $10,000 certificate of deposit was opened in Alaska. While the court found the transfer to be fraudulent under the Bankruptcy Code, it also went out of its way to employ a two-part test where it would only apply Alaska’s laws to the trust if Alaska had a substantial relationship to the trust and the application of Alaska law did not violate a strong public policy of Washington. Needless to say, with only a nominal funding of the trust with in-state assets and Washington’s reluctance to enforce DAPTs, the trust was invalidated.

While little can be done to account for the public policy of a state, some measure of planning can be employed to avoid the implication of fraud and to fund a DAPT with more than just a token gesture of in-state assets.

To learn more about services offered by Goosmann Law Trust Counsel, contact us at info@goosmannlaw.com or by calling 712.226.4000.