Quatloos! > Investment Fraud > Financial Planning > Domestic Asset Protection Trusts

Domestic Asset Protection Trusts

a/k/a "Alaska Trusts" or
"Nevada Trusts" or "Delaware Trusts"

Introduction

The so-called Domestic Asset Protection Trust is a trust with a trust document that has basically the same anti-creditor features as an offshore trust, and is formed in one of the several states that have anti-creditor trust acts and now allow Self-Settled Spendthrift Trusts (i.e., trusts which protect yourself from creditors).

Alaska was the first state to enact an anti-creditor trust act, followed quickly by Delaware, and then later by Nevada. A couple of other states have since enacted nearly identical legislation, but when you think of DAPTs you typically think of these three states. Thus, sometimes these trusts are called, almost interchangeably, "Alaska Trusts", or "Delaware Trusts", or " Nevada Trusts".

Cutting through the marketing whoopla, what you essentially end up with are state trust laws that allow the following:

Self-Settled Spendthrift Trusts - These states allow you to form a trust for your own benefit that protects you against creditors, something expressly disallowed as against public policy of the other 40+ states.

Shorter Statute of Limitations - There is a shorter time period for a creditor to challenge a transfer to one of these trusts.

Conservative Fraudulent Transfer Standards - It is more difficult for a creditor to prove that a transfer to the trust was a fraudulent transfer.

So, how does this stack up to a Foreign Asset Protection Trust? Not at all. There are at least five glaring defects to the Domestic Asset Protection Trust that makes them, at best, a very weak asset protection method.

Glaring Defect #1: The trustee is subject to U.S. jurisdiction
If a U.S. court ordered an offshore trustee to do something, he could choose to simply ignore it since he is not bound by U.S. court decisions. However, a U.S. trustee can be compelled - by being thrown in jail for contempt - to do whatever the U.S. court wants. About as bad is the fact that the U.S. trustee is vulnerable to a civil lawsuit (trustee would rather give up your assets than his own), and also is available to law enforcement authorities that could bring money laundering charges, etc., to coerce the trustee to cooperate. This defect alone, of course, basically guts the alleged protection of the DAPT.

Glaring Defect #2: Full Faith and Credit
One of the best things about offshore trusts was that the offshore jurisdiction wouldn't recognize a U.S. judgment, meaning that a creditor would have to start all over and begin the trial process from Day 1, bringing in witnesses, etc., from the U.S. or wherever, all of which is very expensive and time-consuming, and a is huge deterrent to creditors. Not so for a DAPT. No matter which state you form the trust in, that state is required by the "full faith and credit" clause of the U.S. Constitution to recognize the judgment of any other state. This means that a creditor only has to take its judgment and register the judgment without having to retry the case (a very simple process, done every day by collection firms), and Voila! the creditor is back at your throat.

Glaring Defect #3: Attempts to "import" law or to make a "choice of law" in favor of the laws of Alaska, Delaware, or Nevada will probably fail
Think you can get an Oklahoma judge to apply Alaska law in favor of an Oklahoma resident against an Oklahoma judgment held by an Oklahoma creditor involving Oklahoma property? Ain't happening - and if the trial judge rules against you then it is you (and not the creditor) who is fighting an uphill battle in a probably vain attempt to get the decision reversed on appeal, and in the meantime the creditor gets your assets and even if you win the appeal you might not get them back.

Glaring Defect #4: Federal Courts Will Ignore
Because of the Supremacy Clause of the U.S. Constitution, federal courts are not necessarily bound by state law, which is really ugly considering that the nightmare cases are about as often federal cases, or worse, defenses against federal administrative actions.

Glaring Defect #5: No chance of secrecy
Because the trustee is in the U.S., the trustee will be subject to discovery order and subpoenas, and as each states applies its own procedure (as opposed to substantive law) without regard to the other states' procedure, and the federal courts follow their own procedure, it means that any secrecy protections of the laws of the state where the trust is formed, will be totally irrelevant and ineffective.

Where DAPTs might work

As lame as the DAPT is as an asset protection tool, it probably has a fair-to-middlin' chance of prevailing in the following circumstances:

First, you actually live in Alaska, Delaware, Nevada or a state that has adopted a similar statute, have all of your assets there, fund the trust well in advance and follow all formalities, and avoid federal court actions.

Second, you actually live in Alaska, Delaware, Nevada or a state that has a adopted a similar statute, and you form a Foreign Asset Protection Trust (which, ironically, might stand up to some degree in these states since the Self-Settled Spendthrift Trust anti-public policy argument probably can't be effectively asserted in these states), keep all the assets abroad, and you are willing to flee the country if things get too ugly.

Everybody else should do something else, because for you this probably ain't gonna work.

Summary

Conceptually, the mere existence of the DAPT is proof that there are serious questions about the FAPT. Many of the planners who used to crow about how "foolproof" the FAPT is (or, rather, was supposed to be), have now fallen off the offshore trust bandwagon in favor of domestic trusts.

But don't be fooled by the imitator: While the FAPT has actually been blown up a few times, and the DAPT hasn't, the offshore trust is still a far superior asset protection method to its Domestic variant. Personally, I think that the DAPT is sort of a legalistic "bad joke", unless of course you live in one of the states that allow these trusts, in which case it is simply a tool which though anemic is still probably better than nothing.

What this foreign/domestic vacillation really tells you is that the guys who make asset protection trusts a "centerpiece", or any major piece of their asset protection plan, are totally confused by the failure of their former-champion, the FAPT, and now really don't have much confidence in anything they are doing with trusts as an asset protection method.

But as I stated at the outset of my discussion of trusts, in general trusts are fundamentally lousy asset protection vehicles, and they'd be better to abandon them entirely in favor of the numerous better methods that do work.

We frequently receive calls from folks who have been approached to "purchase" an offshore trust which, they are told, does not need to be reported to the IRS, and which trust will save them a bunch of income taxes. This is the purest B.S. -- there is simply NO WAY TO SAVE INCOME TAXES USING AN OFFSHORE TRUST, and anyone who tells you differently is probably lying. See, e.g., U.S. v. Kraig

This topic is now treated (in considerable depth) at http://www.quatloos.com/taxscams/contrusts.htm