Any reader of my blog knows that there are a number of different ways to protect your assets and your family. Which option you choose will depend greatly on a number of different factors, including: The size and nature of your assets, your goals for your wealth, your family dynamic, whether or not you own a business, and much, much more. One lesser-known but incredibly useful option is the Domestic Asset Protection Trust.
A Domestic Asset Protection Trust (or DAPT) has fundamentally the same anti-creditor features as an offshore trust, allowing a trust grantor to shelter assets from creditors while retaining the rights to distributions from the trust. DAPT’s were first signed into law in Alaska, to compete with offshore trusts.
Be aware that not all states allow for DAPTs, but some states such as Alaska, Nevada and Delaware, allow for the following:
* Self Settled Spendthrift Trusts – allowing you to form a trust for your own benefit that will protect you against creditors. Public policy in most states prohibits this form of trust.
* Shortened Statute of Limitations – essentially a shortened period of time for a creditor to challenge a transfer of funds into one of these trusts.
* Conservative standards regarding Fraudulent Transfers making it more difficult for a creditor to prove that a transfer to a trust was fraudulent.
While a properly drafted DAPT or spendthrift trust may provide some creditor protection, they are not the same as an offshore trust for several reasons.
* First and most importantly no matter what state you form your trust in, your trustee is obligated to abide by the laws of the United States and is subject to U.S. jurisdiction. While an offshore trustee is not bound by U.S. court decisions and may choose to ignore a court order, a U.S. trustee can be compelled to do what the court wants and is also vulnerable to a civil lawsuit.
* Secondly, every state in the U.S. is required by the “full faith and credit” clause of the U.S. Constitution to recognize the judgment of other states. Essentially, a creditor need simply take their judgment and register it with the courts in whatever State your trust is held in. In addition, attempting to import the laws of another state to a court of law will most likely fail.
* Another thing to keep in mind is that a DAPT’s ‘protection’ is derived from state statutes. Federal courts may not be bound by state statute, due to the Supremacy Clause in the U.S. Constitution.
If you are considering a Domestic Asset Protection Trust or Offshore Trust be aware that a properly planned and implemented asset protection plan is a very individual process; there are no “one size fits all” plans. It is essential to work with an experienced attorney to assess your specific needs before committing to a trust or other vehicle for your asset protection. Contact me now to start working on a plan specific to your needs and ensure that your family’s assets are properly protected for yourself and future generations.
Next blog post: Analysis of The Mortensen Case