OTHER ASSET PROTECTION TOOLS - Domestic Asset Protection Trust
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 turst 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may not be withdrawn by the trustmaker.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 general rule established under several court decisions in courts outside Florida is that the trust laws of the state where the debtor resided or where a judgment is being collected will determine whether assets in a DAPT will be protected from creditors regardless of where the DAPT was formed. This rule suggests Florida debtors cannot utilize domestic asset protection trusts settled in one of the states with DAPT statutes
However, 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.
