Domestic Asset Protection Trusts

Oct 28, 2021

Domestic Asset Protection Trusts

You’ve probably seen the news that a multi-year investigative journalist project released a trove of documents called the Pandora Papers. The project linked hundreds of politicians and other high-profile people to offshore trusts and shell companies used to conceal their financial activities, avoid taxes, and shelter assets from creditors. One especially popular device has been the use of asset protection trusts.

Traditionally, it has been relatively straightforward to put our assets in trust for a different person (the beneficiary) and write the trust in such a way as to protect those gifted trust assets from the beneficiary’s creditors. Those trusts have “spendthrift” provisions that typically give the trustee the discretion to pay out income and principal. If the beneficiary’s creditors attack, the trustee would simply not make any distributions. Traditionally, we could not do that for ourselves (i.e., we could not unilaterally put our assets in trust and use the trust as a shield to keep our own creditors from reaching them). Some people, desperate to avoid creditors, would move assets abroad to try to protect them. Over the past twenty-five years, several states, including South Dakota, Ohio, Delaware, Alaska and Nevada have adopted trust laws intended to give U.S. alternatives to those offshore trusts that many people (including us) would be reluctant to use.

Domestic asset protection trusts (DAPT’s) are designed to protect the assets of someone who plans in advance. These laws would not protect the assets of someone who wanted to defraud known creditors. They are intended to give solvent people protection from future creditors. Most doctors we speak with have no current creditors that worry them. But they, like other people of some wealth, have a general vague sense of unease that there might someday be a future problem that could let someone take it all away.

While these are still fairly new, they are not un-tested. The early case law has generally been favorable to DAPTs. This is especially so when the trust settlor actually does move his or her assets into the state in which the trust is established and he or she resides in a state that recognizes the validity of self-settled asset protection trusts.

But even if a creditor can win a judgment in a state that views DAPTs as contrary to public policy, the creditor may still end up being stymied. If the creditor has a judgment from, say, California, the South Dakota trustee would acknowledge it but would inform the creditor that South Dakota trust law doesn’t permit an invasion of the trust to satisfy that judgment.

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Collier & Associates, Inc. provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act on this information without seeking advice from professional advisors.

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