Daryl, a Minnesota resident, discussed asset protection strategies with his estate planning attorney. As they considered his options, they discussed establishing a domestic asset protection trust (DAPT). However, Minnesota does not currently allow the formation of DAPTs. Daryl wondered about the safety of establishing his DAPT in another state.
Define DAPT/structure of a DAPT
Asset protection is only one reason to establish a trust, but it’s often necessary. A DAPT is an irrevocable asset protection trust. The settlors of most asset protection trusts are prohibited from being beneficiaries. However, settlors of DAPT trusts can also be trust beneficiaries. Typically, this access to trust funds makes the trust vulnerable to creditor claims. This is not usually the case with DAPTs.
At this time, only 17 states allow the formation DAPTs:
- New Hampshire
- Rhode Island
- South Dakota
- West Virginia
Laws vary among the DAPT states, making some locales more favorable than others. For example, Nevada is often considered friendly to DAPTs because their law protects trusts from debts like child support and alimony. Most other irrevocable trusts are vulnerable to these claims. South Dakota allows this type of debt access to DAPT funds only if the debt existed when the DAPT was formed.
Taxation can be an issue that helps settlors decide which state is best for their DAPT. Some states levy taxes against DAPTs, while others only tax non-resident DAPTs.
Many states require trust makers to provide an affidavit showing they were solvent when the trust was created. Nevada and South Dakota do not.
The Alaska Supreme Court recently handed down a decision on a lawsuit involving a domestic asset protection trust set in Alaska up by a non-resident.
Toni Trust 1 v. Wacker, 2018 WL 1125033 (2018), stemmed from a lawsuit and countersuit that originated in Montana. After years of litigation, one party attempted to collect on its judgment against the losing party, which owned real property in Montana. However, that property was owned, at least in part, by a DAPT trust established in Alaska. The losing party in the Montana case, Donald Tangwall, sought to overturn decisions and judgments made by Montana courts regarding the property and the DAPT. Several other suits later, along with a bankruptcy proceeding, and this case landed in the Alaska Supreme Court.
In simple terms, the Court arrived at the decision that one state cannot limit the jurisdiction of courts located in another state. The DAPT in this case did not protect property located in a non-DAPT state.
Is a DAPT Safe?
There’s a possibility that setting up a DAPT in another state may be risky. However, for some, the benefits may outweigh the risks. Also, remember that it is important to speak with an attorney before establishing any trust.
The attorneys at Virtus Law assist clients like you with their estate plans. This often includes establishing trusts. To discuss your concerns with one of our attorneys, please call 612.888.1000. Our main office is in Minneapolis, with other offices located in Maplewood, Cambridge, Edina, Mendota Heights, and Red Wing.