Vulnerability for Domestic Asset Protection Trusts
Categories
A recent court case involving a Domestic Asset Protection Trust (DAPT) revealed a possible threat to the protections provided by these powerful asset preservation tools. DAPTsgenerally are used when enhanced creditor protections are desired. Some jurisdictions also provide tax benefits for DAPTs. In January 2015, the Utah Supreme Court ruled in Dahl v. Dahl, a case involving spousal claims to the assets in a DAPT following a divorce.
DAPTs are permitted in sixteen states as of this writing. Trust creators need not reside in the state they elect in the trust’s choice-of-law provision. Dahl v. Dahlhighlighted the DAPT laws of two states. The couple lived in Utah, where they filed for divorce in October 2006, which was subsequently granted in July 2010. The Dahls created a trust in October 2002 that named Nevada State Bank as Trustee, and Nevada was declared the trust’s domicile. However, one issue that arose at trial was whether Nevada’s law should be considered the governing law for the trust. According to the court documents:
Though the trust agreement contained a choice-of-law provision, the order did not specify whether the court was construing the trust according to Utah or Nevada law.
How do Utah and Nevada’s DAPT laws compare? Nevada has consistently ranked as the #1 state for DAPTs on Steve Oshins’ Annual DAPT State Rankings Chart. Utah ranks as #12.
In Dahl v. Dahl, involving the divorce of husband and wife Charles and Kim, Kim instituted the proceedings to acquire a portion of the trust assets she alleged were marital property. Charles admitted that the couple’s marital home and Kim’s interest in other assets were conveyed to the trust. A district court dismissed Kim’s claims; however, the Utah Supreme Court ruled differently, recognizing that the trust was “intended” to be a DAPT, but:
Because Utah has a strong public policy interest in the equitable division of marital assets, we will not enforce the choice-of-law provision contained in the trust. Instead, we construe the trust according to Utah law.
The trust in the Dahl case ultimately was not recognized as a DAPT even though it was intended as one. Individuals who use DAPTs should review trust documents with an asset protection attorney to prevent issues with choice-of-law provisions. DAPTs, like any asset protection tool, lack benefits if they are not prepared and maintained properly. Consult with an experienced asset protection attorney when creating your trust and schedule regular reviews to address issues before they develop.
