14 Jul For Out-of-State Resident DAPTs, a “Substantial Relationship” to the Trust State is Key
A Domestic Asset Protection Trust (DAPT)is an irrevocable trust in which the settlor is allowed to designate himself a discretionary beneficiary or be so named later. The settlor may achieve a range of benefits, including the potential to access the trust’s assets, while certain creditors may have greater difficulty seizing the trust’s assets.According to a leading authority, after 20 years of DAPTs, there isn’t one known case where a creditor was able to get a judgment or settlement against a debtor (where there was no bankruptcy or fraudulent conveyance) and then actually reach into the DAPT and access the trust assets. Just as important, there have been a large unknown number of favorable settlements by plaintiffs who feared going against a DAPT.
Most often, DAPTs are created in a state with specific enabling legislation, but with the settlor domiciled in a non-DAPT state. When courts are called upon to determine the legal sustainability of a DAPT, many considerations will come into play to determine which state’s law will prevail; but the most important is whether the trust has its most substantial relationship to the trust state OR the non-resident settlor’s state of domicile. A properly established DAPT will have all possible significant relationship factors tied to the trust state, so it stands to reason that the trust state’s laws should govern.
We recommend DAPT creators weigh and employthe following environmental and drafting strategies when setting up a client DAPT:
- The corporate trustee should be in the trust state and not market its services to the settlor’s home state.
- Co-trustees should be avoided and certainly not include family members.
- A strong effort should be made to locate all trust assets in the trust state. This is most easily accomplished with cash and investment assets (we can help set this up.) LLCs should be formed in the trust stateto hold financial accounts and miscellaneous assets. Obviously real property can’t be relocated, but in certain cases, it may help to have the property owned by a trust state LLC.
- Trust protectors, investment managers, and distribution advisors should be LLCs organized in the trust state.
- A trust state asset protection attorney should be a part of the legal team.
- Consider holding some non-trust assets in the trust state (e.g., a bank account.)
Substantial relationship is not the sole defense to a plaintiff attacking a DAPT. Non-resident settlors can expect that, for a properly drafted trust,both jurisdictional limitations and the creditor’s lack of full faith and credit enforcement arguments will also be strong barriers to the creditor’s suit. However, because States have widely different public policy views on DAPTs, we believe the surest way for the trust to survive intact is to design it so that its mostsubstantial relationship is with the state of trust formation, for both validity and enforcement purposes.