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DOMESTIC ASSET PROTECTION TRUSTS | Trust Diagrams | Create Trust Worksheets

Domestic Asset Protection Trusts (DAPTs) are now statutorily permitted in Alaska, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Rhode Island, South Dakota, Tennessee, Utah, Wyoming and Ohio. These states allow a settlor to create an irrevocable trust which is structured to provide discretionary distributions to the settlor as a beneficiary of the trust without exposing the trust to claims of the settlor’s creditors (see sources of liability). In the event of a lawsuit against the settlor, the Trustee would discontinue any distributions to the settlor until the litigation threat went away or the case settled. Oklahoma also has passed legislation providing for an asset protection trust, however, the settlor may not be a beneficiary of the trust but the settlor’s spouse and children may be permissible beneficiaries. Our office recommends Nevada which has a very debtor-oriented DAPT statute and other beneficial statutes. Since such trusts must comply with Nevada statutes, we work together with Nevada counsel to ensure appropriate statutory compliance. As with offshore asset protection trusts, DAPTs should provide for a trust Protector. A trust Protector might be a trusted friend, advisor, law firm, accountant, etc The trust Protector should be given the power to veto actions of the trustee and to replace the trustee for any reason. The Protector should not be given the power to appoint himself as trustee or co-trustee. The Protector, however, should be given the authority to appoint a successor Protector.

The general rule regarding whether creditors can reach trust assets is expressed in the Restatement of Trust Second: “Where a person creates for his own benefit a trust for support, or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.” In other words if a person established a trust in which such person was a beneficiary or potential beneficiary, a judgment creditor of that settlor could attach the trust assets to satisfy the judgment. In 1997 Alaska and Delaware passed legislation which deviated from this rule and allowed self-settled asset protection trusts. Such legislation expressed a public policy which allowed the settlor to be a permissible beneficiary of such trust, yet the settlor's creditors cannot attach the trust assets. In good times, the trustee can pay out funds to the settlor but in the event of a litigation threat the funds are shut off and the trust assets cannot be attached. Since 1997, eleven other states have followed Alaska and Delaware in enacting similar legislation permitting self-settled asset protection trusts.

DAPT statutes are therefore relatively new and have not been tested in the courts. One issue is whether a DAPT state would be required to enforce a judgment rendered in a sister state. For example, assume that a settlor who lives in Illinois creates an irrevocable domestic asset protection trust in Nevada. A creditor sues the trust settlor in Illinois and obtains a judgment in Illinois. Illinois does not allow self-settled spendthrift trusts. But settlor's assets are in a DAPT in Nevada. The creditor would then seek to enforce the Illinois judgment in Nevada against the assets in the Nevada trust. The issue becomes whether Nevada would be required to give full faith and credit to the Illinois judgment or whether Nevada's public policy as expressed in its DAPT legislation would prevail. Would the Full Faith and Credit Clause of the U.S. Constitution require the DAPT state to disregard its own stated public policy and require Nevada to honor a judgment rendered in a sister state with a different public policy. This is a constitutional question which eventually would have to be decided by the U.S. Supreme Court.

In fact, there have not been many cases at all regarding these DAPTS in any state. It may be that there are no cases because they are being settled out of court (and for good reason). Domestic Asset Protection Trusts present quite an obstacle for creditors who understand they will incur, not only the original litigation expenses, but also the costs associated with trying to enforce any judgment against the DAPT in a state which has declared its public policy to favor such trusts. Not only could a creditor not be certain that any judgment would be enforced in the DAPT state, a creditor could also not be certain of the outcome of any appeals of that case. The creditor could wind up with tremendous litigation expenses and receive no recovery whatsoever. This is why the DAPT might have a chilling effect on even the most zealous creditor and lead to a favorable settlement for the trust settlor.

For persons concerned about exposing their assets to creditors, but reluctant to spend the funds necessary to obtain the highest level of protection available with foreign situs-offshore trusts, the Domestic Asset Protection Trust will be an appropriate choice.

Contact us to discuss establishing a Domestic Asset Protection Trust or use the DAPT Create Trust Worksheets to assist us with your wishes.