Domestic Asset Protection Trust

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A so-called “self-settled” trust is a trust where the person who creates the trust and transfers the assets to the trust is also a trust beneficiary.  A living trust is a common example of a self-settled trust used for estate planning.  Under Florida law established by a long and consistent line of court decisions, a self-settled trust does not protect the trustmaker’s beneficial interest in the income or principal of the trust from the trustmaker’s creditors.

Offshore trusts provide asset protection benefits mainly because statutes in select foreign countries state that a trustmaker’s beneficial interest in a self-settled trust formed in their country is protected from the trustmaker’s own creditors.  These offshore trust statutes include other debtor-friendly provisions to encourage new trust business.  Some states in the United States have recently enacted statutes which expressly grant these same type of asset protection benefits to self-settled trusts at one time found only offshore.  Trusts created under these state statutes are referred to as domestic asset protection trusts (“DAPT”).  These DAPTs were encouraged by state legislatures in an attempt to provide investors and business owners the protection of offshore trust planning within the United States in large part to attract businesses and assets to their states.

Most state DAPT statutes have several common features.  The statutes provide that the DAPT is irrevocable so that assets transferred to the trust may not be withdrawn by the trustmaker.  The statutes also require at least one trustee to be either a state resident or a corporation doing business in the state.  Some trust assets must be located or deposited in the state.  The DAPT statutes, like their foreign counterparts, typically provide for a position of “trust protector” who is a person with power to veto the trustee’s decisions to make distributions if such distributions may be vulnerable to the trustmaker’s creditors.

Alaska, Delaware, and Nevada are states with favorable domestic asset protection trust laws.  Of these three states, many attorneys consider Nevada to be the best DAPT jurisdiction.  For example, Nevada law provides creditors the ability to challenge asset transfers to a trust as a fraudulent conveyance two years after the transfer is made or six months after the transfer is discovered.  In Alaska and Delaware, by contrast, a creditor has four years to challenge a fraudulent conveyance to their states’ DAPTs.  Nevada law also has relatively flexible trustee provisions under which a settlor can appoint himself as trustee over trust investments as long as an independent trustee has discretion to make trust distributions.

A DAPT works well in theory, and many qualified commentators have published persuasive legal arguments supporting the DAPT’s asset protection.  However, to date, no Florida court has evaluated a debtor’s interest in a DAPT formed under the laws of another state.

The legal issue in DAPT planning is referred to as  “conflict of law” law” issue. The issue can be summarized as follows: if a Florida resident forms a self-settled trust in a DAPT state where these trusts are expressly protected from all creditors, will Florida courts apply the protective laws of the DAPT state which has encouraged self-settled trust protections or the Florida law opposing self-settled trust protection?

Resolving the conflict between Florida’s public policy against self-settled trusts and contrary policy in DAPT states is legally complicated and involves a multi-step fact analysis. In general, based upon principles in the Restatement of Trusts, if a Florida debtor establishes a DAPT trust and neither the debtor nor his beneficiaries reside in the DAPT state and the trust holds no assets  in the DAPT state a Florida court probably would  not  permit the DAPT to protect the debtor from Florida creditors. If the DAPT state holds some trust assets a Florida court may still find that  the debtor’s DAPT is contrary to Florida’s public policy against self-settled trusts. If most trust assets are in Florida and the debtor resides in Florida, most Florida courts will  permit creditors to reach assets held in the asset protection trusts. A Florida debtor would have a better defense if trust owns significant  property in the DAPT trust state and all trustees are located in the same DAPT state.

These principles suggest that  Florida debtors cannot utilize domestic asset protection trusts settled in one of the states with DAPT statutes, and that most Florida courts will not permit a Florida debtor’s self-settled trust to protect assets in a Florida collection proceeding.

There are possibilities to structure estate planning trusts in Florida to achieve asset protection. Although assets in the debtor’s own living trust, a form of self-settled trust, are not protected from the debtor’s creditors, a Florida resident may protect assets in a trust created by another person. There is authority from at least one Florida federal court that a debtor’s interest in a trust which the debtor forms or funds with his own non-exempt money will be protected from creditors if anyone other than the debtor is given control over trust assets. Therefore, a properly drafted Florida trust may provide the trustmaker effective asset protection even though Florida has not enacted specific asset protection trust statutes.

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.