Asset Protection Trusts – A Holy Grail of Protection?

asset protection, trust, clint coonsImpregnable asset protection is for some individuals the holy grail of planning. For most seeking this type of protection the expressways are well marked – take a trip to Belize or the Cook Islands and set up a trust. If properly structured, your assets will be safe and you can retire in luxury despite any judgments rendered against you. In theory this sounds enticing and many individuals have sought this form of protection only to discover the IRS does not share their enthusiasm for offshore embattlements. I for one, have never been a supporter of these strategies because of the risk that comes from anupset Uncle Sam or trusted offshore trustee who decides to become to familiar with your assets. (I appreciate that my opinion is not necessarily reflective of all offshore situations and if properly structured the risk is minimal; however, given I was born an Aries, my opinions are difficult to change.)

Given my reluctance to follow in the path of those who look beyond our borders, you should know from many of my previous posts that I believe strongly in the power of Limited LiabilityCompanies when it comes to asset protection. For many of the people with whom I work, the LLC offers the perfect blend of flexibility and protection. However, if someone is willing to sacrifice on flexibility and to some extent taxes, then an even better choice for asset protection is a DomesticAsset Protection Trust "DAPT".

A DAPT is a trust that has basically the same benefits as an offshore trust, and is formed in one of the several states (Currently only thirteen states offer this form of trust – Alaska, Colorado, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, and Wyoming). What is especially unique about this body of statutes is their departure from common law trust principles. Under common law, a Grantor (the person who creates the trust and funds it) cannot create a trust for his own benefit and expect creditor protection for the assets transferred into the trust. This is often referred to as a "Self-Settled Spendthrift Trust" for creditor protection.

The laws in the "favored 13" jurisdictions typically contain the following provisions:

  • Self-Settled Spendthrift – You can form a trust for your own benefit that protects you against creditors, something expressly disallowed as against public policy of the other 37 states.
  • Shortened Statute of Limitations – There is a shortened time period for a creditor to challenge a transfer to one of these trusts. Typically 3 years.
  • Conservative Fraudulent Transfer Standards – It is more difficult for a creditor to prove that a transfer to the trust was a fraudulent transfer.
  • Assets or Trustee in State – The assets of the trust or a trustee must reside in the state where the trust is domiciled.

You will note that although these states permit the creation of Self-Settled Spendthrift trusts their laws do place some restrictions on timing. Essentially, you cannot throw together a DAPT as the creditors are braying at your door and hope to have your assets protected. The key to success is being early to the party before the lawsuit arrives, and staying for a while, i.e., seasoning of your assets. Arrive late to the party and you won’t be allowed in.

So you might be asking yourself why is Clint bringing this to my attention? The answer is South Dakota. In South Dakota the party will never be closed to Johnny Come Lately.
South Dakota recently upped the ante in the "my laws offer more protection" game with their new asset protection law that takes effect on July 1, 2011.

Under all DAPT laws a transfer into a trust is ineffective to shield assets from a person you have injuredprior to the transfer e.g., a tenant alleges toxic mold poisoning and brings a claim for millions of dollars and you place your assets into a DAPT for protection. The injured party can defeat the transfer and recover against your assets. South Dakota does not see it this way and effective March 1, pre-existing tort creditors are not longer protected against transfers.

Why the importance? Two weeks ago I wrote about an individual who accidently injured a person while working on his rental. This deceased’s heirs are bringing an actionagainst the property owner for wrongful death and the insurance is refusing to provide coverage. This property owner is staring down the barrel of a loaded gun with no hope of protection for his assets – that is until now. To protect himself the property could create a DAPT in South Dakota to hold his assets. If the heirs are successful in their action, the assets transferred into the DAPT should be protected.

Should you find yourself in a situation where you failed to follow basic asset protection dogma and held dangerous assets in your own name, South Dakota is offering you a "get out of jail" free card. But, as with all things, it is better not to find yourself in jail to begin with. The use of prevention should always be used despite the effectiveness of a cure.

0 comments On Asset Protection Trusts – A Holy Grail of Protection?

  • Clint, once we see the RV, what is the cost for (1) Nevada DAPT, (2) Nevada Series LLC.
    Thanks in advance
    Rick S

    PS, I’m not a Nev. resident.

  • Interesting

  • Hi can you please provide more information of the South Dakota new asset protection law that took effect on July 1, 2011.

    I can find anything about it.? Do you have a link to a website from South Dakota with information on this .
    Thanks

  • Interesting information. I am personally interested in a comparison between the DAPT and Common Law trust, and to which one holds the most protection.

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