In our ongoing series debunking of legal business practices we continue with Domestic Asset Protection Trusts (DAPTs). These are simply statutory trusts, created by the laws of currently 16 states, which allow the creator of the trust or ‘grantor/trustor’ to create an irrevocable trust for his/her own benefit (self-settled) while presumably protecting the trust assets from creditors. These trusts developed in competition with the popular offshore trusts, as the states saw a business opportunity and attorneys wanted a more expedient alternative to going offshore. A DAPT must have a trustee with discretion present in the DAPT state, which adds to the expense of ongoing administration. Further, a grantor will likely require a ‘protector’ of the trust in his/her home state, such as an attorney who will intermediate with the grantor and the trustee regarding trust management and monitor trust assets (all for a fee of course).  Alternatively, an attorney may be made a co-trustee.

The point here is that these trusts are not anything particularly special although they will work and in many cases protect the trust assets from creditors, depending on the state where the trust is formed. Basically each state with DAPTs will permit different types of creditor to get to trust assets no matter what: creditors such as divorcing spouses, government authorities, pre-existing tort creditors, and alimony creditors may be allowed access to the trust regardless of any statute of limitations having tolled, depending on the particular laws of a state. Only Nevada has no such special creditor exceptions.

Each state will have its own time period for how long any asset must be placed within the trust before it will be protected from creditors, and furthermore all transfers are subject to ‘fraudulent conveyance’ rules of a given state and federal bankruptcy laws. This means if there is ‘actual intent’ to defraud, hinder, or delay a creditor, and a transfer into the trust is made within a certain time period before the commencement of litigation (usually 2 or 3 years) then the conveyance may be set aside. In addition, the statute of limitations for transfers into the DAPT may be stopped for pre-existing creditors (creditors who are owed money when the trust is created and funded). Generally, under state statutes, assets must be in a trust for at least one year to be protected (separate from fraudulent conveyance rules). Therefore, DAPTs need to be set up and assets transferred into them long in advance.

A DAPT can generally hold any type of asset, but if you don’t live in the DAPT state where it is formed you run the risk of having your home state laws apply to that asset. Besides that, there is always the risk that your home state, where DAPTs may be against public policy, will apply its own laws to a given law suit and order an asset that is owned by the DAPT in another state turned over, therefore case law on these trusts is wholly unsettled, and since a minority of states allow them, you run the risk of having a home state judgments enforced by the DAPT state under the ‘full faith and credit’ clause. A risk which likely renders the DAPT moot.

A lot of attorneys will recommend an LLC used in conjunction with the DAPT, and some will even create a double LLC structure along with the DAPT, with one LLC being used as a source of regular income for a client while the coast is clear, but if litigation does arise the second LLC which is owned by the DAPT will become activated and will pay the DAPT which will then distribute the payments to the beneficiaries who will presumably not be the defendant who has lost a judgment. So while the creditor may hold a charging order against both LLCs, one LLC ceases its distributions providing nothing to the creditor and the second LLC will make distributions to the trust which will pay beneficiaries other than than the debtor, effectively circumventing the charging order. This is a painstaking and expensive process to set up and manage, paper-wise and tax-wise, and attorneys love it. A single LLC owned by a DAPT can be used similarly; in the event of a judgment it will only make distributions to the DAPT which will then distribute the funds to beneficiaries who are not the debtor. There are other more efficient methods to get around a charging order and they involve offshore entities.

In contrast, offshore trusts and other legal entities have a distinct advantage in that they as a rule do not recognize US civil judgments, and any lawsuit completed in the US must be re-litigated in the offshore jurisdiction. These offshore jurisdictions also generally require the positing of a substantial bond to proceed with any litigation, and do not permit contingency fee arrangements. This means the plaintiff will have to put up significant amounts just to begin any court proceedings. Furthermore, if this hurdle appears to be breached the terms of the offshore entity may permit appointment of a 3rd party manager or trustee who will then be permitted to immediately remove the trust or entity assets to another jurisdiction and into another trust or entity. The moved trust/entity can continue making distributions as normal since there is no legal process or order against such an entity and the debtor continues as if nothing happened.

The conclusion here is that offshore protection is far superior to any domestic asset protection plan which may occur, as US law in general favors creditors. Offshore laws are far more favorable to asset protection purposes, and the obstacles in front of creditors are costly and time-consuming to pierce, though not to imply impossible here. You don’t want to deal with wishy-washy statutes and uncertain laws where you have no idea how a judge will decide regarding the funds you’ve built up over a lifetime or your valuable assets. If assets are not transferable overseas, they can be easily transferred into an DAPT owned LLC which owns an offshore entity which can then own a domestic asset or another similar structure may be used; this is a rock solid plan that will foil most creditors. Offshore entities are tax neutral, and your tax preparer can easily file all required tax forms regarding its assets such as FBAR and FATCA. These entities are not intended to be used for tax evasion.

If you have any questions regarding offshore or onshore asset protection planning don’t hesitate to contact this Firm and we will design the least costly and easiest-to-manage plan possible which is custom tailored to your needs and will raise a tremendous armor-plated bulwark in front of any adversaries seeking to relieve you of your assets.