The Domestic Asset Protection Trust (DAPT) is the onshore response to concerns surrounding offshore asset protection vehicles, but are the onshore and offshore varieties of asset protection equivalent? Despite the surface similarities between DAPTs and asset protection vehicles based in the Caribbean and other offshore hotspots, the degree of creditor protection offered by them can be very different.
After a brief discussion of the history of DAPTs, this article examines the battle tactics used by creditors to break DAPTs and access trust assets.
A Short History of Domestic Asset Protection Trusts
Alaska took the asset protection lead in the U.S. in 1997 when it created a trust framework having several tax and asset-preservation advantages that, together, are more advantageous to trust settlors than the traditional trust laws of the other states. Interested in bringing significant assets and banking and trust administration business into the state, Alaska’s DAPT legislation requires that trusts have an Alaska operating nexus—although the settlor does not need to claim Alaska as his domicile.
Recognizing the opportunity to generate business in their borders, Delaware, Nevada and Rhode Island followed Alaska’s lead and drafted their own DAPT statutes. Colorado, Hawaii, Missouri, New Hampshire, Oklahoma, South Dakota, Tennessee, Utah and Wyoming jumped into the DAPT business, although there may be significant differences between the degree of creditor protection and tax advantages offered by each state.
And regardless of the state where a DAPT is formed, the U.S. situs (location) of the trust gives creditors, including the IRS, easier access to trust assets.
Creditor Battle Tactics
DAPTs are an ambitious attempt to give U.S. trusts some of the desirable characteristics of offshore trusts, but the creditor protection and tax planning aspects of the trusts are subject to potential technical legal challenges that have not yet been fully resolved—resulting in a degree of uncertainty for DAPT settlors. What follows is a discussion of the basic battle tactics employed by creditors attacking a DAPT:
- Fraudulent Transfer;
- Choice of Law;
- Improper Implementation.
Most DAPT statutes will allow a creditor to access trust assets when the settlor made a fraudulent transfer of assets to the trust to defraud the creditor. So where there are current or foreseeable future liabilities of the settlor at the time the trust is created, creditors may be able to attack a DAPT as a fraudulent transfer. And even where there were no current or foreseeable liabilities at the trust’s inception, creditors often resort—rightfully or wrongfully—to the fraudulent transfer attack.
Fortunately, the fraudulent transfer attack can often be neutralized by using competent counsel to draft and fund the trust. Generally, a statute of limitations will often bar creditors from attacking a DAPT after some period of time has passed. And some states (e.g., Nevada) require creditors to bring a fraudulent transfer challenge within a period of time after the transfer is made or the creditor discovers the transfer was made to the trust.
As discussed in the next section, the time limitation on a creditor’s attack will depend on which state’s laws apply—the state where the settlor resides or the state where the trust was formed.
Choice of Law