Domestic Asset Protection Trusts

Several debtor friendly states have recently enacted legislation permitting property owners to form a domestic asset protection trust and create “irrevocable trusts” which protect them litigation and creditor claims. For reference, view this website offering to create domestic asset protection trusts, with the supposed benefit of an offshore trust, for an example of a company trying to make money. Their website is clearly in the middle of being updated and yet they are still more than happy to provide these “services”. One has to wonder about the quality of their trusts if they cannot even build a website.

We will first cover how these trusts work, then why you should be cautious and will finish with words on how such trusts can still be useful if properly understood. Third party trustees control the assets and only make them available according to the trust documents stated intentions. They are also sometimes called Interest Only Irrevocable Trusts (IOTTs) because the person who settles the trust is not allowed access to the principal and may only receive the interest earned on said principal. These trusts, also referred to as Domestic Asset Protection Trusts (DAPTs), present a seemingly exciting newfound opportunity for wealthy individuals to place their assets in trust, maintain partial control, and still be able to shield those assets from creditors if any litigation arises.

We have to provide a word of caution, however, as these domestic trusts are essentially brand new creations. This means they are untested in court as there is no precedence. We don’t say this to scare you, just to let you know you should be aware…carpe diem.

Second, the assets still exist domestically and are thus within easy reach of creditors. This uncertain nature, and even more uncertain outcome for those first willing to use them, have not stopped so-called “asset protection strategists” from selling these trusts at exorbitant rates to those desperate enough to try them. Quickly searching google provides numerous law firms willing to take individuals money for these domestic asset protection trusts under the guise of their being an asset protection panacea. As a further word of caution, the general common law rule of the Uniform Fraudulent Transfers Act strictly forbids this golden opportunity. It sets a ten year look back period for transfers and states such “self-settled” trusts are visibly against public policy. Wyoming, Alaska and others have attempted to set their relevant look back periods to a mere two years, but these are untested. The states involved are hardly known for their forward thinking.

These types of structures are not entirely worthless. A properly structured and legitimately funded QST or statutory DAPT can provide protection from attachment by creditors. It is important to keep in mind, though, that DAPT legislation does not allow the hiding of assets from already known creditors, or allow one to knowingly violate the Uniform Fraudulent Transfers Act; rather, it enables possible asset protection from potential future creditor litigation and judgements.

Domestic Asset Protection Trusts are different frommedic appeal to those wishing for protection without requiring loss of control or or necessitating moving them to foreign jurisdictions. Potential candidates are most frequently professionals, physicians, attorneys, business owners, and anyone else worried about their potential exposure to lawsuits and creditors. Whether this seeming panacea offers what individuals seek has yet to be established, but one thing remains true: caveat emptor.

Whatever you choose to call it, a qualified settlement fund, called a QSF or a Section 468B Trust, is a flexible dispute resolution mechanism. A QSF allows for a tax-free way station. It is a simple trust that serves as a stopping point after one or more defendants pay money to settle a case but before the plaintiffs receive it. Miraculously, the defendant can take a tax deduction for the payment into the QSF, yet the plaintiffs do not have to include anything in income until the money is distributed. The QSF is ideal when there are many plaintiffs. It is also useful when there is some kind of claims procedure that must occur or other nuances of settlement. The QSF allows the various plaintiffs to determine precisely how they want their payment(s): whether in a lump sum, a structured settlement, to establish an MSA or a combination thereof.

An old adage says that time stands still for no one. Maybe so, but in most circumstances, a QSF can give plaintiffs and their counsel time that is simply invaluable. A QSF allows the parties’ time to consider payment options thoughtfully and carefully, while negating mistakes in the rush to get documents signed. First, a QSF must be subject to court supervision; second, the trust must exist to resolve or satisfy a legal claim; and finally the trust must qualify under state law. QSFs are not appropriate to settle every single case. In many situations however, it can make the settlement process smoother, more efficient and much more closely tailored to what the plaintiffs and their counsel really need and want.

You may also place the qualified settlement fund into a domestic asset protection trust for further asset protection benefits.