Asset Protection Trusts can be very useful tools as a part of a well thought out, comprehensive asset protection plan.   In a recent blog, we took a look at DAPT trusts and the pro’s and con’s associated with this particular type of trust.

An interesting case in which a domestic asset protection trust failed to protect assets in a bankruptcy case has been getting a lot of commentary amongst asset planning professionals of late.  I’m referring to the Mortensen case in Alaska, where DAPT’s, or self settled spendthrift trusts, are allowed by state law.

Tom Mortensen was an Alaska resident with a master’s degree in Geology.  In 1998 Mortensen and his wife were divorced.  As part of the divorce settlement, Mortensen received approximately 1.25 acres of remote real property near Seldovia, Alaska.  In 2005, Mortensen decided to draft his own asset protection trust using a template he found.  He created a self settled Alaska Trust called ‘The Mortensen Seldovia Trust (an Alaska Asset Preservation Trust) into which he transferred the Seldovia property and $80,000 in cash.  In 2009, Mortensen filed for Chapter 7 bankruptcy and did not declare the assets in the Trust as part of the bankruptcy estate.

When drafting an asset protection plan, one must be cognizant of both state and federal laws.   According to Alaska state statutes, an Alaska Trust has a 4-year statute of limitations, so in theory Mortensen’s trust was well seasoned and should have held up in court.

Unfortunately for Mortensen, revisions in the federal bankruptcy code in 2005 extended the statute of limitations to 10 years in cases where transfers into a trust seem motivated by attempts to avoid paying debts.  In this case, the judge found that he transferred the property into the trust for the express purpose of avoiding paying his mounting debt, and applied the 10-year rule, overruling Alaska state statute and allowing his creditors to recover from the trust.

While DAPT trusts do give a certain degree of protection, the strongest protection is an offshore trust prepared by a skilled asset protection lawyer.

Mortensen made the mistake of attempting to do his own planning, did not understand or follow the rules, and got himself into trouble.  This case is a perfect example of why a skilled asset protection lawyer should be retained to draft a comprehensive asset protection plan for you.

If you have questions regarding a trust or are considering asset protection planning, please contact our offices to begin preparing an individual asset protection strategy to address your individual needs.

We have years of experience and understand the complexities of state and federal laws regarding asset protection. Don’t leave yourself vulnerable to lawsuits and creditors.  Contact us today.

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