Monday, November 14, 2011

Is Domestic Asset Protection Dead?

There has been quite a bit of buzz about a recent bankruptcy case involving an Alaska asset protection trust. However, the case merely confirms a weakness in the use of domestic asset protection trusts that was obvious even before this case.  

Domestic asset protection trusts (DAPTs) promise the holy grail of creditor protection - a trust where the settlor/grantor can transfer assets to, be a discretionary beneficiary of. but still have the assets of the trust be protected from the settlor's/grantor's creditors. Alaska, Delaware, and Nevada are three popular jurisdictions for these trusts.

There are open questions about the effectiveness of the trusts for creditor protection purpose, including enforceability across state lines under the U.S. Constitution. A major issue is the 10 year voidability provision of 11 U.S.c. Section 548(e) that entered the U.S. Bankruptcy Code in 2005.

In Battley v. Mortensen, a bankruptcy court in Alaska found that a transfer to a DAPT could run afoul of 11 U.s.e. Section 548(e), even though the debtor was solvent at the time of creation of the trust.
The court noted:  

"when property is transferred to a self-settled trust with the intention of protecting it from creditors, and the trust's express purpose is to protect that asset from creditors, both the trust and the transfer manifest the same intent. In this case, I found that the trust's express purpose could provide evidence of fraudulent intent."

Since a debtor can be placed in bankruptcy by his creditors on an involuntary basis, one cannot simply avoid this exposure by not filing for bankruptcy protection.

The result in Mortensen is clear: Domestic Asset Protection Trusts don’t protect assets from creditors for the first ten years after the trust is settled.

As we have been advising clients for years, only a Foreign (Non US) Juridiction can provide certainty of your asset protection solutions.  With Domestic Asset Protection, you never KNOW that you do not have it until, a US Judge decides that you do not have it!

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