A domestic asset protection trust (DAPT) is a self-settled spendthrift trust (SSST) created in one of the U.S. states that allow for their creation. There is some question as to how effective they are as stand-alone asset protection tools, especially when a dispute crosses state lines. Though DAPT’s are relatively new, here are 3 recent cases that provide some insight.
Battley v. Mortensen (2011)
Facts: Suffering numerous financial difficulties, Thomas Mortensen racked up tens of thousands of dollars in credit card debt. In 2005, he established an Alaska DAPT and transferred a 1.25 acre property into the trust. In 2009, he became ill and was unable to work for a long period as a result. With thousands of dollars in medical bills, and credit card debt now up to $250,000, he filed for Chapter 7 bankruptcy.
Issue: At issue was whether the transfer of the property into the trust was a fraudulent conveyance (a transfer made with the “actual intent to hinder, delay, or defraud” a creditor).
Result: The transfer was found to be fraudulent. In determining this, the court considered Mortensen’s circumstances at the time the trust was created, as well as the express purpose of the trust (“to maximize the protection of the trust estate or estates from creditors’ claims of the Grantor or any beneficiary and to minimize all wealth transfer taxes”).
Importance: The bankruptcy court used federal law, rather than the more favorable (to Mortensen) Alaska law. This meant, among other things, that the Bankruptcy Code’s 10-year statute of limitations would apply, rather than Alaska’s much shorter 4-year period.
In re Huber (2013)
Facts: In 2008, Donald Huber, a real estate investor living in Washington State, was having business troubles as a result of the declining real estate market. He created an Alaska DAPT and subsequently transferred the majority of his assets into it. By 2011, with multiple creditors knocking at the door, he filed a Chapter 11 bankruptcy reorganization, which was then converted to a Chapter 7 bankruptcy.
Issue: The bankruptcy court had to decide whether to apply the law of Washington State or that of Alaska (where the trust was set up).
Result: The court determined the law of Washington State should apply. In addition to Huber’s limited contacts with Alaska, Washington State has a strong public policy against SSST’s. In fact, Washington State law specifically voids transfers to a SSST against existing or future creditors.
Importance: Even though the trust was set up in Alaska, under Alaska law, the court applied Washington State law, causing the DAPT protections to crumble. Deference was given to Alaska’s strong public policy against SSST’s.
Dahl v. Dahl (2015)
Facts: This decision arises out of a long and dramatic divorce case in Utah (called a “train wreck” by the district court). Dr. Charles Dahl filed for divorce from his wife, Kim Dahl, in 2006 after many years of marriage. In 2002, while still married and using marital property, Dr. Dahl set up a domestic asset protection trust (or what he thought was one) in Nevada, called The Dahl Family Irrevocable Trust.
Issue: Kim Dahl asked the court to grant her a share of the trust’s assets, claiming that it was actually a revocable trust. (Even though it was otherwise drafted as a DAPT, the following language was for some reason included in the trust: “Settlor reserves any power whatsoever to alter or amend any of the terms or provisions hereof.”)
Result: Ultimately, the Utah Supreme Court sided with her and declared the trust was not, in fact, a DAPT, but a revocable trust. The court reached this result by applying Utah law, despite a choice-of-law provision (choosing Nevada) in the trust. This was done so as to not “undermine a strong public policy of the state of Utah,” in this case, the equitable distribution of marital assets during divorce.
Importance: Once again, the choice of law issue did not work out in favor of the trust creator. This happened even though the trust itself dictated the use of Nevada law, and even though Utah is also a DAPT state. In fact, it was done for reasons unrelated to SSST’s altogether.
These cases are not without their critics. Some say the decisions are unique and would only apply to anomalous fact patterns (indeed, these cases highlight some good examples of bad asset protection planning). Others say the courts applied the wrong law, or just made bad decisions altogether. Nevertheless, what these cases illustrate is that DAPT’s, when used alone, are vulnerable to U.S. judicial scrutiny, especially when a non-DAPT state court gets involved.
However, this does not mean that domestic asset protection trusts should be discounted altogether. They still provide strong asset protection when used in conjunction with an international asset protection trust (as with the Bridge Trust™). Most importantly, these cases show that your asset protection plan needs to be crafted with precision. It is unique to you and your circumstances. Everything – where you live, where your assets are located, what your goals are – needs to be taken into account to give you the best protection possible.
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