DAPTs: We’re #10 (Wyoming) or #12 (Utah)! Or Should Everyone Move to Nevada?

Scales of JusticeSo 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.

Oh! Not Again! The Need for Ancillary Probate

As we’ve discussed elsewhere, in an almost knee jerk way, people want to avoid probate. And for some good reasons. But what if I told you there were a possibility your heirs might have to go through two or even three probates? It’s true. If you own titled property, especially real estate, in another state than the one you live and die in, your personal representative is probably going to have to file probate papers in all the states where that property is located. And with that comes the added expense of additional attorneys and such.

It’s called ancillary probate, ancillary because its subsidiary or supplementary to the larger probate, the one in your state of residence where presumably most of your property is located. You can avoid ancillary probate a variety of ways. If the out-of-state property is real estate, you could simply make sure that another person is on the deed with you with rights of survivorship. That way, when you die, the property passes automatically to that person, without probate.   Or you could title the property using a so-called transfer on death deed, which are allowed in a number of states. Or you could hold the property in a revocable or living trust.

The trust approach is my preferred method because, unlike the other methods, this one makes it easier to direct the property to where you want it to go once the property is held in the name of the trust.

What is Probate Anyway?

Everybody wants to avoid probate, but far too many of those who want to avoid it, know what is. Here’s a primer:

Probate is the legal process in which a deceased person’s will is proved valid; her personal representative or executor appointed; her property collected and preserved; and her debts, including taxes, paid. Usually, the deceased’s family hires an attorney to file the appropriate papers with the probate court to begin the process. Depending on the state and the complexity or size of the state, the probate process can be complicated or streamlined. In Utah, for example, if the deceased’s estate is under $100,000, probate can be handled via a so-called small estate affidavit, a much more simple process.

The deceased person’s personal representative (another term for executor) is the point person in the process. Essentially, a personal representative fills the shoes of the deceased. What the deceased could do if she were still alive, the personal representative does instead. Need to transfer title? The personal representative does that. Need to close a bank account. Again, the personal representative steps up. Often (but not always) named in the deceased’s will, the personal representative, once he has the court’s blessing, is the one who goes about collecting property, paying debts, and–finally–distributing what’s left to the deceased’s heirs. Often (but again, not always) this is done under court supervision, depending again on the state and the size/complexity of the estate.

Why do people say they want to avoid probate? Probably because they’ve heard it’s expensive–which it can be–or because they’ve heard it’s public–which it is; that is, it’s public in the sense that your nosey neighbor can walk down to the courthouse and ask the clerk to see your probate file. Then it really becomes public.

There are a number of ways to avoid probate the attendant publicity and some of the cost. One is to establish a revocable or living trust. For more on that, go here.

Trustees and Beneficiaries: More Good News than Bad?

I really like the idea behind “The Positive Story Project,” a new monthly column at Wealthmanagement.com. Here’ the first three paragraph from the opening salvo:

My goal in writing this column is to focus thinking within our community of practitioners—important players in the transfer of wealth to younger generations.   And, with so much at stake for our clients and their families—a good deal more than preservation of financial assets—let’s make this column a conversation.

Can the widespread dissatisfaction and all the talk of “problem” beneficiaries and “problem” trustees, give way to more creative and productive relationships?  I say:  “Absolutely.”  And, if your intuition is the same as mine, the harder question becomes “how do we get from here to there?”

To begin to find out, my colleague, Kathy Wiseman, and I have been going to the source—beneficiaries, trustees and their advisors—asking them for positive stories about moments in time when their relationships have worked well.  I’ll discuss what can be learned from these individuals and their stories in this column each month.

I look forward to more on this subject, both to help me as a practitioner and to inspire my clients and potential clients to use trusts to better carry out their wishes.

Trusts: Size Matters

The trusts I draft are almost always quite long–in excess of 40 pages. I sometimes wonder if they’re too long. And then I encounter a problem caused by a short, poorly drafted trust and wonder no more.

Folks, you probably won’t discover what’s wrong with your trust or your parents’ trust until one of the grantors dies or becomes incapacitated, but by then it will probably be too late to do anything. That’s why you and your attorney must be very careful in the beginning to think through your plan and make sure your estate planning documents are in good order. You should make sure they cover the many contingencies that could result in a weeping and wailing and gnashing of teeth if (when?) disgruntled beneficiaries decide to challenge the trustee.

Don’t think that will happen in your family? Then you haven’t seen what money or the lack thereof can do to people, people known as beneficiaries. I’m watching this happen right now. Three siblings arguing that a fourth sibling/trustee is up to no good. Most of their argument is based on what they perceive as a badly drafted 7- or 8- page trust.

Now without agreeing with them–in fact, I disagree with them–I can say unequivocally that a good 40+ page trust would easily withstand their assault. Why? Because those 40+ pages aren’t just boiler plate, thrown in to make the trust look official. No, those pages are chock full of provisions that deal with death, divorce, incapacity, disgruntled beneficiaries, and  the like. They give powers to the trustee to do what the grantor would do if he or she were still alive when the unforeseen need arises. In short, those extra pages ensure that the trust will do what it’s supposed to do well after the grantor has ridden off into the sunset.

So no, I don’t worry any more that my trusts are too long. They’re not. They cover all the bases, and that’s just right.

Estate Planning? I Don’t Have Time . . .

Why doves cry. Half of Prince’s estate to go to government.

Cyber Intestacy? Yeah, There’s That.

What happens to your Facebook, Twitter, and Instagram persona when you die? You might want to consider that question. 

Gonna Be a Prince of a Mess

Well, I guess since Prince didn’t have one, you don’t need one either . . .

Prince’s sister has said the superstar musician had no known will and that she has filed paperwork asking a Minneapolis court appoint a special administrator to oversee his estate.

Something tells me this will neither go smoothly nor end well.

Quote for the Day

A lot of wisdom in this quote and just one more reason to consider leaving your children’s inheritance in trust rather than giving it to them outright:

“Those who inherit fortunes are frequently more of a problem than those who made them.”

 Congolese Proverb

Quote for the Day

“A trust can be an effective foundation for asset protection planning. Trusts have been utilized for centuries as a means of conserving and protecting property for the beneficiaries of the trust. However, most domestic trusts do not provide protection from creditors. The typical revocable living trust, where the trustors are the lifetime beneficiaries and retain the power to revoke, amend and invade the principal of the trust, provides no protection whatsoever against the creditors of the trustors. Accordingly, absent specific legislation to the contrary, self-created or so-called self-settled trusts are ineffective for asset protection planning purposes.”

“A Primer On Asset Protection Planning,” Jeffrey Matson and Jonathan Mintz, WealthCounsel Quarterly, April 2015

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