So attorney Steve Oshins publishes annual state rankings of virtually all things trusts. Want to know where your state’s decanting statute ranks? Go here. Interested in establishing a so-called dynasty trust? Look here to see what your state offers–if anything. How does your state treat non-grantor trusts for income tax purposes? Well, some states do better than others, let me tell you. Nevada and South Dakota, for example, are #1 or #2 for both decanting and dynasty trust statutes and have no state income tax.
Which brings me to the subject of this post: Domestic [as opposed to foreign] Asset Protection Trusts or DAPTs. Oshins ranks them as well. How do Utah and Wyoming–the two states I practice in–stack up? Well, the headline gives away the answer. As of April 2016, sixteen states offered some form of a DAPT, including Oklahoma, Virginia, and West Virginia–the three new kids on the block. Wyoming ranks 10th on that list, Utah 12th. Sounds better if you say 10th and 12th out of 50, doesn’t it, especially since 34 states have no DAPT statute on the books. For the record, Nevada and South Dakota rank #1 and #2 among DAPT states.
Which brings me to an important question: If you’re interested in protecting your assets from predators–slip and fall creditors, for example, with a court judgment in hand–should you set your domestic asset protection trust up using your own state’s DAPT statute, if it has one, or should you use another state’s possibly more debtor-friendly statute? No surprise here: The answer is not clear.
Without getting too far into the weeds, let’s take a look at few comments that indicate there may be a bump or two in the road ahead for those who may decide to establish a DAPT using another state’s trust laws. First off is the Utah Supreme Court in the recent Dahl v. Dahl case (2015). Mrs. Dahl sued Dr. Dahl to get access to marital assets in a supposedly irrevocable trust established under Nevada law (a DAPT trust we assume, though that’s not clear from the case)–remember, Nevada purportedly has the best DAPT statute on the books.
One question before the court was whether to interpret the trust according to Utah or Nevada law–something the law refers to as a conflicts or choice of law question. The court decided to go with Utah law, saying:
Under Utah choice-of-law rules, we will generally enforce a choice-of-law provision contained in a trust document, unless doing so would undermine a strong public policy of the State of Utah. (emphasis added)
The strong public policy in this case was protecting the divorced spouse. And Utah’s law did just that. As the court said,
. . . to the extent that the Trust corpus contains marital property, Utah has a strong interest in ensuring that such property is equitably divided in the parties’ divorce action.
Who knows what the outcome would have been had the person suing been a slip and fall judgment creditor rather than an aggrieved spouse? Would the court of have interpreted the trust according to Nevada law, in which case, the party suing might have lost? That’s the problem: who knows?
Next up is the Uniform Laws Commission, which adopted amendments to the Uniform Fraudulent Conveyances Act in 2014, changing the name of the act to the Uniform Voidable Transactions Act and adding “a new Section 10 that provides that the law of an individual’s residence is to be the governing law concerning whether such individual has made a voidable transfer,” according a report by Leimberg Information Services. How does that apply to DAPTs? Well, again according to Leimberg,
The revisions to the comments [to the proposed law] erroneously state further that a transfer to a self-settled spendthrift trust [a DAPT in other words] is a voidable transfer per se and, therefore, that an individual who lives in a state that does not recognize asset protection trusts (“APTs”) cannot protect assets by creating an APT in a state that does recognize APTs . . .
Did you get that? According to Leimberg, residents of non-DAPT states can’t use another state’s DAPT statutes to protect their assets. Now, the comment doesn’t have the force of law–it’s just a comment after all. But it does give us some idea of how at least some legal eagles are thinking about asset protection trusts. They don’t like ’em.
All this is not to say that persons wishing to set up a DAPT using the law of another state should not consider doing so. However, it bears repeating that those who choose to do so should be careful, crossing all the T’s and dotting those I’s. That Dahl case I referred to above, the one where the Utah ex-wife got her share from the Dr.-husband’s Nevada-based DAPT? Despite the fact that the trust had “Irrevocable” in its name, that the trust was established under Nevada law, and that it was clearly intended to be a DAPT, the court said the trust was revocable. Why? Because the court wanted to protect the spouse and because a scrivener’s error–an error by the attorney who drafted the trust–gave them an avenue do so. Here’s what the trust said:
Trust Irrevocable. The Trust hereby established is irrevocable. Settlor [the Dr. in this case] reserves any power whatsoever to alter or amend any of the terms or provisions hereof. (emphasis added by the court)
Of course the attorney meant to say “Settlor reserves no power whatsoever,” and the court knew that, else why would the trust say it was irrevocable both just a few words before and in the title and in other places in the document as well? But the court needed an excuse and because a T wasn’t crossed and an I wasn’t dotted, the trust failed to do its duty.
Simple drafting errors aren’t the only thing that can get a DAPT into trouble, but the fact that something so minor can have such huge consequences, should be warning enough to take care of the big issues as well. We’ll discuss those larger issues in another post.
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