Why do domestic asset protection trusts (DAPTs) fail? Also, this might be the reason why you don’t want a domestic asset protection trust—or for that matter, a foreign asset protection trust—because they’re really structured the same way. It’s just a matter of whether it’s a jurisdiction within the United States, which we refer to as a domestic asset protection trust, or a jurisdiction that’s offshore, which we would call a foreign asset protection trust or offshore asset protection trust.
I’ve watched a lot of videos on YouTube and read a lot of different blogs from a variety of different types of advisors about these asset protection trusts. There’s a lot of different material and thoughts about these, which I think is very interesting. I will comment that I see a lot of content produced—videos and otherwise—from people who are not attorneys, and I think that is a huge red flag and a huge problem. I don’t know why they’re in this industry, and I don’t know how they’ve not been sanctioned for the unlicensed practice of law. That’s another story, but I am curious about that. I think a lot of times, you’ll see videos and content that, to me, are gimmicky and sleazy. They often come from outfits that may not be actual law firms or attorneys. So that’s something to think through.
Often, you’ll see them talking about how domestic asset protection trusts fail and that’s why you have to go with a foreign asset protection trust because only a foreign asset protection trust is really foolproof. They’ll say, “Courts are going after domestic asset protection trusts, and they’re failing. We see them failing all the time. We’re seeing courts have claims against them, and it goes on and on.” But there’s no real substance, no sense of details shared about why these DAPTs are no good, why you have to go with the FAPT, and why they’re failing.
So, this is what we do know: We know that DAPTs, if done properly, will protect your assets from creditor claims. Can someone have an enforceable creditor claim against a DAPT? Sure, that’s possible, but that isn’t necessarily always the case. This is where DAPTs—and FAPTs, for that matter—fail: when there is a fraudulent transfer or fraudulent conveyance to the trust.
So, how does this even work with a DAPT or a FAPT? You have a client who is the settlor; they’re setting up the trust, a self-settled trust, for the benefit of themselves. They’re moving their own assets into that trust—self-settled, self-funded—although someone else could put assets in there as well. It’s also self-benefiting. If done legitimately and correctly, there’s no issue. The issue is when you start transferring those assets to that trust—that’s where people get in trouble, and that’s where these things really fail.
Each state that has an asset protection trust statute that allows for these—and if you’ve watched my videos before, then you know that not every state or jurisdiction has a self-settled, self-benefiting irrevocable trust. For example, Texas doesn’t have one, California doesn’t have one, New York doesn’t, Florida doesn’t. Some of these larger states, where I see a lot of clients coming from, don’t have them. We do our planning in South Dakota. South Dakota, along with every other jurisdiction that has these asset protection trust laws, has a statute of limitations. They want to help clients protect their assets from creditors; they want to make this available. They see it as a good thing to give citizens the ability to protect themselves from frivolous lawsuits—especially wealthy clients, business owners, or whoever it may be—but they also don’t want it abused. That is reasonable, that makes sense, and that’s a good policy consideration.
The way to cut down on these issues of abuse is through fraudulent conveyance or fraudulent transfer laws. Ultimately, what that says is there’s a statute of limitations for being able to transfer assets to the DAPT or FAPT without someone bringing a claim and trying to say, “You fraudulently transferred those assets for purposes of defrauding a creditor,” or “This creditor has a claim against you, and you’re trying to avoid it by setting this DAPT up and transferring the assets in.”
Typically, when this happens, there’s going to be an existing creditor, meaning they have a creditor claim against you, and you know about that, and you go ahead and set up the DAPT or FAPT and transfer the assets over. That’s usually the most common situation. There are other situations, but I’m not going to focus on all of those; we’re just going to focus on this more common situation.
Each jurisdiction, along with the statute of limitations, differs. South Dakota’s is two years, Nevada’s is two years, Ohio has a DAPT statute, and I believe it’s only six months, which I think is the shortest of any state. Delaware’s is four years. Wyoming has become more popular, for whatever reason, as an asset protection trust jurisdiction. There are a whole lot of reasons why it is not the best jurisdiction, even though it’s gaining more popularity. I don’t remember what their statute of limitations is; it might be two years, four years, five years—I can’t remember. I’m thinking it’s four or five.
Along with that statute of limitations that I just discussed, the creditor also has to prove that you fraudulently made that conveyance or transfer. The level of proof that they must present to the court differs from state to state. That is something else to look at when you’re thinking about which state has the best asset protection trust laws. In South Dakota, as well as Nevada, it’s “clear and convincing,” which is usually the highest level, the highest standard of proof that must be presented to the court for them to decide that there is a fraudulent conveyance that has occurred. I won’t go into all the details about what they actually have to present—that’s probably a case-by-case situation—but ultimately, you look at two things: the statute of limitations and then also what level of evidence has to be presented for the court to decide there has been a fraudulent conveyance.
The point of all of this is, this is where people get in trouble with DAPTs. This is where they end up failing people because they didn’t do the planning correctly. So, if that is your situation and you have a current creditor claim against you, it’s going to be very, very difficult to successfully set up a DAPT.
The other thing to think about with this is whether or not you have great privacy laws that are attached to the DAPT laws. That’s what South Dakota really, really focuses on, and what’s unique about South Dakota from any other state—and other states don’t have this—is, let’s just say there was some type of lawsuit against a trust that was set up in South Dakota. Any of the details that come out in that court proceeding have an automatic seal, and it’s a perpetual seal, meaning that it will never become subject to the public domain. Other states don’t have that. Delaware has something similar in that they give the judge discretion to be able to seal any information that comes out about a trust in a court proceeding; however, it is not perpetual and only lasts for three years.
So, people shouldn’t be scared to set up DAPTs when they hear, “Oh, they’re failing,” or even FAPTs for that matter, because they’re failing. They’re being challenged like they should be challenged, right? People who have claims, if they really want to try to have a claim against someone, should be trying to track down where they have assets or where they have a trust and should be trying to challenge the legitimacy of a trust. Any good attorney is going to represent their client to the fullest extent possible and would try to hunt down and figure out where this client might have set up a domestic asset protection trust.
Good luck on figuring that out! I think you have to be really committed and have the manpower to figure that out. A good attorney would try to challenge that, but that doesn’t mean anything. Just because they’re being challenged doesn’t mean anything. We’ve seen that the creditor protection itself is working. We’ve seen those being challenged, and to my knowledge and other attorneys I know, we’ve not seen the actual creditor protection aspect of it fail anyone. But what we do see are issues with the fraudulent conveyance, and that’s where people get in trouble.