Facts about Domestic Asset Protection Trusts (DAPTs)

The Domestic Asset Protection Trust (DAPT) is a trust with a trust document that has fundamentally the same anti-creditor features as an offshore trust, and is formed in one of several states having anti-creditor trust acts and presently allows Self-Settled Spendthrift Trusts (i.e., trusts allowing you to establish a trust for yourself which will protect you from creditors). Alaska was the first state to enact an anti-creditor trust act, followed by Delaware and then later on by Nevada. Several of other states have since enacted identical legislation, but when anyone thinks of DAPTs they usually think of these three states. Therefore, sometimes these trusts are called "Alaska Trusts," or "Delaware Trusts," or "Nevada Trusts."

Cutting through the marketing, what you essentially end up with are state trust laws allowing the following:

Self-Settled Spendthrift Trusts – These states will allow you to form a trust for your own benefit that will protect you against creditors, something expressly prohibited compared with public policy in all the other states.

Shortened Statute of Limitations – There is a shortened period of time for a creditor to challenge a transfer to one of these trusts.

Conservative Fraudulent Transfer Standards – It is more difficult for a creditor to prove that a transfer to the trust was a fraudulent transfer.

The DAPT was created mainly as a marketing tool in an attempt to exploit the growing market for the Foreign Asset Protection Trust (FAPT). However, the FAPT went out of vogue, and many planners now advocate the use of DAPTs as primary asset protection planning vehicles for clients. However, as with the FAPT before it, the benefits of the DAPT are mostly theoretical, and, thus far, there have been no significant court cases which have validated the benefits of DAPTs in tough debtor-creditor situations. At the same time, the false hype of FAPT promoters, who claimed that an Anderson- or Lawrence case-type situation could "never occur," are all too fresh in memory and similar claims are being made by some DAPT promoters. Therefore, it is a laudable goal to attempt to evaluate how the DAPT might fare in certain scenarios, including scenarios having already occurred with the very similar FAPT.

There are at least five glaring defects to the DAPT that makes them, at best, a very weak asset protection method:

Defect one: The trustee is subject to U.S. jurisdiction

If a U.S. court ordered an offshore trustee to do something, he could simply ignore it since he is not bound by U.S. court decisions. However, a U.S. trustee can be compelled (by being thrown in jail for contempt of court) to do what the U.S. court wants. Almost as bad is the fact that the U.S. trustee is vulnerable to a civil lawsuit, as well as available to law enforcement authorities that could bring money laundering charges, etc., to coerce the trustee to cooperate. This defect alone guts the alleged protection of the DAPT.

Defect two: Full Faith and Credit

One of the best things about offshore trusts was that the offshore jurisdiction wouldn’t recognize a U.S. judgment, meaning that a creditor would have to start over and start the trial process all over again, bringing in witnesses, evidence, etc., from the U.S., all of which is very expensive and time-consuming, and is huge deterrent to creditors. This is not true for a DAPT. No matter which state the trust is formed in, that state is required by the "full faith and credit" clause of the U.S. Constitution to recognize the judgment of other states. This means that all a creditor has to do is take its judgment and register the judgment without having to retry the case, and presto the creditor is knocking at your door again.

Defect three: Attempting to "import" law or to make a "choice of law" favoring the laws of Alaska, Delaware, or Nevada will fail

If you think you can get an Indiana judge to apply Alaska law in favor of an Indiana resident against an Indiana judgment held by an Indiana creditor which involves Indiana property? Well, you can just forget about that sort of thing happening. And if the trial judge rules against you, then you (and not the creditor) will wind up fighting an uphill battle in a vain attempt to get the decision reversed on appeal, while in the meantime the creditor gets your assets. Even if you win the appeal, there is a chance that you might not get them back.

Defect four: Federal Courts ignore state law

Because of the Supremacy Clause of the U.S. Constitution, federal courts are not necessarily bound by state law, which is really vile when you consider that most nightmare cases are as often federal cases, or worse, defenses against federal administrative actions.

Defect five: No secrecy

Because the trustee resides in the U.S., he will be subject to discovery order and subpoenas, and as each state applies its own procedure (as opposed to substantive law) without regard to the other states' procedure, while the federal courts follow their own procedure, it means that any secrecy protections of the laws of the state where the trust is formed will wind up being totally irrelevant and ineffective.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.

 


 

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