Analysis of Domestic Asset Protection Trusts
Domestic Asset Protection Trusts Neutered by Bankruptcy Reform
The 2005 changes to the Bankruptcy Code have created a new 10-year limitations period for transfers to self-settled trusts which are meant to hinder, delay or defraud creditors. This effectively means that all transfers to domestic asset protection trusts will be suspect for the 10 years prior to the date that a bankruptcy petition is filed. Because of this, domestic asset protection trusts should not be considered for asset protection planning and, indeed, in most circumstances it might be malpractice per se for an advisor to form a DAPT for his client if asset protection is a concern.
Introduction
The so-called Domestic Asset Protection Trust (DAPT) is a trust with a trust document that has basically the same anti-creditor features as an offshore trust, and is formed in one of the several states that have anti-creditor trust acts and now allow Self-Settled Spendthrift Trusts (i.e., trusts that allow you to establish a trust for yourself which protect you from creditors). Alaska was the first state to enact an anti-creditor trust act, followed quickly by Delaware, and then later by Nevada. A couple of other states have since enacted nearly identical legislation, but when you think of DAPTs you typically think of these three states. Thus, sometimes these trusts are called, almost interchangeably, "Alaska Trusts", or "Delaware Trusts", or " Nevada Trusts".
Cutting through the marketing whoopla, what you essentially end up with are state trust laws that allow the following:
Self-Settled Spendthrift Trusts -- These states allow you to form a trust for your own benefit that protects you against creditors, something expressly disallowed as against public policy of the other 40+ states.
Shortened Statute of Limitations -- There is a shortened time period for a creditor to challenge a transfer to one of these trusts.
Conservative Fraudulent Transfer Standards -- It is more difficult for a creditor to prove that a transfer to the trust was a fraudulent transfer.
The DAPT was created largely as a marketing tool to attempt to exploit the growing market for the Foreign Asset Protection Trust ("FAPT"). After the Anderson and Lawrence cases, the FAPT went out of vogue, and many planners are now advocating the use of DAPTs as a primary asset protection planning vehicle for clients. However, as with the FAPT before it, the benefits of the DAPT are largely theoretical, and as of this writing there have been no significant court cases validating the benefits of DAPTs in tough debtor-creditor situations. At the same time, the false hype of the FAPT promoters, who claimed that an Anderson- or Lawrence-type situation could "never occur", are all too fresh in memory and similar claims are now being made by some DAPT promoters. Thus, it is a laudable goal to attempt to objectively evaluate how the DAPT might fare in certain scenarios, including scenarios that have already occurred with the very similar FAPT.
There are at least five glaring defects to the Domestic Asset Protection Trust that makes them, at best, a very weak asset protection method.
Glaring Defect #1: The trustee is subject to U.S. jurisdiction
If a U.S. court ordered an offshore trustee to do something, he could choose to simply ignore it since he is not bound by U.S. court decisions. However, a U.S. trustee can be compelled -- by being thrown in jail for contempt -- to do whatever the U.S. court wants. About as bad is the fact that the U.S. trustee is vulnerable to a civil lawsuit (trustee would rather give up your assets than his own), and also is available to law enforcement authorities that could bring money laundering charges, etc., to coerce the trustee to cooperate. This defect alone, of course, basically guts the alleged protection of the DAPT.
Glaring Defect #2: Full Faith and Credit
One of the best things about offshore trusts was that the offshore jurisdiction wouldn't recognize a U.S. judgment, meaning that a creditor would have to start all over and begin the trial process from Day 1, bringing in witnesses, etc., from the U.S. or wherever, all of which is very expensive and time-consuming, and a is huge deterrent to creditors. Not so for a DAPT. No matter which state you form the trust in, that state is required by the "full faith and credit" clause of the U.S. Constitution to recognize the judgment of any other state. This means that a creditor only has to take its judgment and register the judgment without having to retry the case (a very simple process, done every day by collection firms), and Voila! the creditor is back at your throat.
Glaring Defect #3: Attempts to "import" law or to make a "choice of law" in favor of the laws of Alaska, Delaware, or Nevada will probably fail
Think you can get an Oklahoma judge to apply Alaska law in favor of an Oklahoma resident against an Oklahoma judgment held by an Oklahoma creditor involving Oklahoma property? Ain't happening -- and if the trial judge rules against you then it is you (and not the creditor) who is fighting an uphill battle in a probably vain attempt to get the decision reversed on appeal, and in the meantime the creditor gets your assets and even if you win the appeal you might not get them back.
Glaring Defect #4: Federal Courts Will Ignore
Because of the Supremacy Clause of the U.S. Constitution, federal courts are not necessarily bound by state law, which is really ugly considering that the nightmare cases are about as often federal cases, or worse, defenses against federal administrative actions.
Glaring Defect #5: No Chance of Secrecy
Because the trustee is in the U.S., the trustee will be subject to discovery order and subpoenas, and as each states applies its own procedure (as opposed to substantive law) without regard to the other states' procedure, and the federal courts follow their own procedure, it means that any secrecy protections of the laws of the state where the trust is formed, will be totally irrelevant and ineffective.
Some Exemplary Scenarios
The scenarios that follow are based on the following hypothetical: The Settlor domiciled in a state that does not allow self-settled spendthrift trusts ("Non-State") transfers assets from Non-State to a DAPT formed in DAPT-State. Later, Settlor is sued by civil Claimant in federal court sitting in Non-State. Claimant wins judgment against Settlor. Federal judge chooses Non-State fraudulent transfer law to set aside transfer as a fraudulent transfer, or the federal judge determines that the DAPT is void against the public policy of Non-State.
Typically, asset protection cases are hotly contested cases involving competent litigators for both the debtor and creditor. This is because the average controversy does not become an asset protection case. The average case is settled, often with the settlement being paid by an insurance carrier. By contrast, asset protection cases have not settled since they have gone on to judgment, and typically pit affluent individuals seeking to protect their wealthy against determined and often well-financed creditors (and sometimes governmental creditors).
Additionally, asset protection presumes that the creditor is "right" and that the equities are on the side of the creditor. If this weren't the case, it was unlikely that the creditor would have obtained a judgment. Thus, the following scenarios anticipate that a judgment has been entered against the debtor by a judge who has come to believe that the judgment the judge has entered in favor of the creditor was warranted by the circumstances, and that the creditor should be paid on its judgment.
To more directly focus on the issues, it is presumed that the case is in federal court in a Non-State, and arises out from federal law, such as a claim arising under the Securities Act of 1933. Note, however, that many of the results below might still occur if the federal court was sitting in diversity, or if the suit were brought in state court for a claim arising under state law.
Scenario I
Direct FEDERAL COURT Order to Trustee
Relief Granted
Under the broad relief provisions of the Uniform Fraudulent Transfers Act adopted by Non-State, the federal judge enters an order compelling the DAPT Trustee to repatriate the assets to the Non-State.
Possible Effects
The Trustee risks contempt by not repatriating the assets as ordered by the federal judge.
If the Trustee repatriates the assets to the Non-State as required by the federal judge, the Claimant will be able to attach the assets.
Notes
This is a circumstance where an order entered by the courts of Non-State might not have the same power as an order issued by a federal court, since of course the state court's power to enforce its orders stops at its borders (but see the Bank of Nova Scotia scenario below). The powers of the federal courts are, of course, nationwide and not reliant upon the Full Faith & Credit Clause.
Possible Authority
Federal Rule of Civil Procedure 64 ("At the commencement of and during the course of an action, all remedies providing for seizure of person or property for the purpose of securing satisfaction of the judgment ultimately to be entered in the action are available under the circumstances and in the manner provided by the law of the state in which the district court is held, existing at the time the remedy is sought . . ..") (Emphasis added).
Scenario II
Anderson Scenario
The federal judge sitting in Non-State enters an order compelling Settlor to repatriate the assets from the DAPT-State to the Non-State.
Possible Effects
If the Settlor refuses, the federal judge can order Settlor held in contempt for years.
The Settlor might be held in contempt even if the Settlor has no ability to repatriate the assets to the Non-State.
Note
Those held in contempt in relation to FAPTs have consistently denied that they had any ability to repatriate the money from their foreign trusts, for example, but the judges involved have consistently ignored those claims.
A state court judge of Non-State could impose the same remedy.
Analogous Case
Federal Trade Commission v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999) (affirming order incarcerating for six months settlors of Foreign Asset Protection Trust formed in the Cook Islands, with trust formed year prior to settlors' bad conduct, who refused to repatriate trust assets to Nevada; settlors' trust company later paid Federal Trade Commission settlement of $1 million to release trust company only from liability; Federal Trade Commission continues to pursuit settlors on underlying judgment) (this case is popularly known as the "Anderson case", since the Andersons were the settlors who were incarcerated and the real parties in interest in this appeal).
Scenario III
Lawrence Scenario
The Settlor files for bankruptcy, or is forced into bankruptcy, in federal bankruptcy court sitting in the Non-DAPT State. The federal bankruptcy judge determines, under the laws of the Non-DAPT State, that the assets of the DAPT are part of the Settlor's bankruptcy estate. The federal bankruptcy judge enters an order compelling the Settlor to repatriate the assets from the DAPT-State to the Non-State, and to turn the assets over to the federal bankruptcy trustee.
Possible Effects
If the Settlor does not repatriate the assets, the Settlor may be held in contempt literally for years by the federal bankruptcy judge.
The Settlor's discharge may be denied.
The Settlor may be charged with bankruptcy fraud.
The Settlor, the Settlor's Planners in both the Non-State and DAPT-State, and the Trustee, may be charged with conspiracy to commit bankruptcy fraud.
Analogous Case
Lawrence v. Goldberg, 279 F.3d 1294 (11th Cir. 2002) (affirming contempt order incarcerating debtor who had funded asset protection trust in Mauritius and then refused to list assets on bankruptcy schedule of assets or repatriate the assets to Florida; debtor originally incarcerated in 1999 and still incarcerated as of 2002; debtor's discharge denied).
Scenario IV
Bank of Nova Scotia Scenario
The Trustee of the DAPT keeps the trust assets with Coast-to-Coast Brokerage Firm, which has a branch in Non-State (or any Non-State). The federal judge enters an order against the Coast-to-Coast branch in Non-State requiring Coast-to-Coast to turn over the trust assets to the Claimant.
Possible Effects
Coast-to-Coast Brokerage Firm has to provide the assets to Claimant or face contempt and possibly significant fines.
Notes
This result would probably be the same if a court in Non-State ordered the local branch of Coast-to-Coast to turn over the trust assets to the Claimant.
Analogous Case
U.S. v. Bank of Nova Scotia, 740 F.2d 817 (11th Cir. 1984) (order of civil contempt fine of $25,000 per day and total fine of $1,825,000 affirmed against Miami branch of international bank that refused to disclose account records of Bahamas branch of bank to federal grand jury).
Scenario V
Civil Conspiracy Scenario
Claimant files a lawsuit for civil conspiracy under laws of Non-State against Settlor, and Settlor's planners in Non-State, Settlor's planners in DAPT-State, and against Trustee in Non-State. The federal judge finds that personal jurisdiction of DAPT-State Planner and Trustee is proper, insofar as the trust was intended to defeat the rights of creditors (whether known or unknown) in Non-State.
Possible Effects:
Civil conspiracy is an intentional tort. If Claimant's original action was dischargeable in bankruptcy, the effect is that the Settlor has converted a dischargeable action into one that is not dischargeable in bankruptcy.
Settlor's Non-State Planners, Settlor's DAPT-State Planners, and the DAPT-State Trustee become personally liable for underlying judgment against Settlor.
Settlor's Non-State Planners and DAPT-State Planners might be subject to professional discipline for engaging in a civil conspiracy in violation of the laws of Non-State.
The federal judgment for conspiracy against Trustee would be enforceable, despite the DAPT laws of the DAPT State.
Analogous Cases
Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406 (3rd Cir. Appeal No. 02-2087, May 30, 2003). See also 1994 Land Fund II v. Ramur, Inc., No. 05-98-00074-CV (Tex.App. 5th Dist. 2001) (recognizing civil conspiracy theory arising from fraudulent transfer); A.T. Stephens Enterprises, Inc. v. Arnold Johns, 757 So.2d 416 (Ala. 2000) (judgment upheld for civil conspiracy to defraud creditors). Monastra v. Konica Business Machines, 43 Cal.App.4th 1628 (1996) (recognizing civil conspiracy action for defrauding creditors); Summers v. Hagen, 852 P.2d 1165 (Alaska, 1993) (in an action for conspiracy to fraudulently convey property, if the remedy of voiding the transfer is inadequate, the plaintiff is entitled to the lesser of the value of the property fraudulent transferred or the amount of the debt); McElhanon v. Hing, 728 P.2d 273 (Ariz. 1986) (a cause of action lies against a judgment debtor's attorney who conspires with the debtor to defraud the creditor).
SUMMARY
Where DAPTs might work
As lame as the DAPT is as an asset protection tool, it probably has a fair-to-middlin' chance of prevailing in the following circumstances:
First, you actually live in Alaska, Delaware, Nevada or a state that has adopted a similar statute, have all of your assets there, fund the trust well in advance, keep the assets in either property in that state or in banks that have no branches in non-DAPT states, follow all formalities, and avoid federal court actions.
Second, you actually live in Alaska, Delaware, Nevada or a state that has a adopted a similar statute, and you form a Foreign Asset Protection Trust (which, ironically, might stand up to some degree in these states since the Self-Settled Spendthrift Trust anti-public policy argument probably can't be effectively asserted in these states), keep all the assets abroad, and you are willing to flee the country if things get too ugly.
Everybody else should do something else, because for you this probably isn't going to work.
Conclusion
Conceptually, the mere existence of the DAPT is proof that there are serious questions about the FAPT. Many of the planners who used to crow about how "foolproof" the FAPT is (or, rather, was supposed to be), have now fallen off the offshore trust bandwagon in favor of domestic trusts. But don't be fooled by the imitator: While the FAPT has actually been repeatedly blown up in the U.S. courts, and the DAPT hasn't, the offshore trust is still a far superior asset protection method to its Domestic variant -- since at least with an FAPT you can flee the country and your assets are already outside the U.S. Personally, I think that the DAPT is sort of a legalistic "bad joke", unless of course you live in one of the states that allow these trusts, in which case it is simply a tool which, though anemic, is still probably better than nothing. Because of the potential flaws noted above, perhaps the term "Defective Asset Protection Trust" is a better name.
What this foreign/domestic vacillation really tells you is that the guys who make asset protection trusts a "centerpiece", or any major piece of their asset protection plan, are totally confused by the failure of their former-champion, the FAPT, and now really don't have much confidence in anything they are doing with trusts as an asset protection method. But as I stated at the outset of my discussion of trusts, in general trusts are fundamentally lousy asset protection vehicles, and they'd be better to abandon them entirely in favor of the numerous better methods that do work.
The 2005 changes to the Bankruptcy Code have created a new 10-year limitations period for transfers to self-settled trusts which are meant to hinder, delay or defraud creditors. This effectively means that all transfers to domestic asset protection trusts will be suspect for the 10 years prior to the date that a bankruptcy petition is filed. Because of this, domestic asset protection trusts should not be considered for asset protection planning and, indeed, in most circumstances it might be malpractice per se for an advisor to form a DAPT for his client if asset protection is a concern.
Introduction
The so-called Domestic Asset Protection Trust (DAPT) is a trust with a trust document that has basically the same anti-creditor features as an offshore trust, and is formed in one of the several states that have anti-creditor trust acts and now allow Self-Settled Spendthrift Trusts (i.e., trusts that allow you to establish a trust for yourself which protect you from creditors). Alaska was the first state to enact an anti-creditor trust act, followed quickly by Delaware, and then later by Nevada. A couple of other states have since enacted nearly identical legislation, but when you think of DAPTs you typically think of these three states. Thus, sometimes these trusts are called, almost interchangeably, "Alaska Trusts", or "Delaware Trusts", or " Nevada Trusts".
Cutting through the marketing whoopla, what you essentially end up with are state trust laws that allow the following:
Self-Settled Spendthrift Trusts -- These states allow you to form a trust for your own benefit that protects you against creditors, something expressly disallowed as against public policy of the other 40+ states.
Shortened Statute of Limitations -- There is a shortened time period for a creditor to challenge a transfer to one of these trusts.
Conservative Fraudulent Transfer Standards -- It is more difficult for a creditor to prove that a transfer to the trust was a fraudulent transfer.
The DAPT was created largely as a marketing tool to attempt to exploit the growing market for the Foreign Asset Protection Trust ("FAPT"). After the Anderson and Lawrence cases, the FAPT went out of vogue, and many planners are now advocating the use of DAPTs as a primary asset protection planning vehicle for clients. However, as with the FAPT before it, the benefits of the DAPT are largely theoretical, and as of this writing there have been no significant court cases validating the benefits of DAPTs in tough debtor-creditor situations. At the same time, the false hype of the FAPT promoters, who claimed that an Anderson- or Lawrence-type situation could "never occur", are all too fresh in memory and similar claims are now being made by some DAPT promoters. Thus, it is a laudable goal to attempt to objectively evaluate how the DAPT might fare in certain scenarios, including scenarios that have already occurred with the very similar FAPT.
There are at least five glaring defects to the Domestic Asset Protection Trust that makes them, at best, a very weak asset protection method.
Glaring Defect #1: The trustee is subject to U.S. jurisdiction
If a U.S. court ordered an offshore trustee to do something, he could choose to simply ignore it since he is not bound by U.S. court decisions. However, a U.S. trustee can be compelled -- by being thrown in jail for contempt -- to do whatever the U.S. court wants. About as bad is the fact that the U.S. trustee is vulnerable to a civil lawsuit (trustee would rather give up your assets than his own), and also is available to law enforcement authorities that could bring money laundering charges, etc., to coerce the trustee to cooperate. This defect alone, of course, basically guts the alleged protection of the DAPT.
Glaring Defect #2: Full Faith and Credit
One of the best things about offshore trusts was that the offshore jurisdiction wouldn't recognize a U.S. judgment, meaning that a creditor would have to start all over and begin the trial process from Day 1, bringing in witnesses, etc., from the U.S. or wherever, all of which is very expensive and time-consuming, and a is huge deterrent to creditors. Not so for a DAPT. No matter which state you form the trust in, that state is required by the "full faith and credit" clause of the U.S. Constitution to recognize the judgment of any other state. This means that a creditor only has to take its judgment and register the judgment without having to retry the case (a very simple process, done every day by collection firms), and Voila! the creditor is back at your throat.
Glaring Defect #3: Attempts to "import" law or to make a "choice of law" in favor of the laws of Alaska, Delaware, or Nevada will probably fail
Think you can get an Oklahoma judge to apply Alaska law in favor of an Oklahoma resident against an Oklahoma judgment held by an Oklahoma creditor involving Oklahoma property? Ain't happening -- and if the trial judge rules against you then it is you (and not the creditor) who is fighting an uphill battle in a probably vain attempt to get the decision reversed on appeal, and in the meantime the creditor gets your assets and even if you win the appeal you might not get them back.
Glaring Defect #4: Federal Courts Will Ignore
Because of the Supremacy Clause of the U.S. Constitution, federal courts are not necessarily bound by state law, which is really ugly considering that the nightmare cases are about as often federal cases, or worse, defenses against federal administrative actions.
Glaring Defect #5: No Chance of Secrecy
Because the trustee is in the U.S., the trustee will be subject to discovery order and subpoenas, and as each states applies its own procedure (as opposed to substantive law) without regard to the other states' procedure, and the federal courts follow their own procedure, it means that any secrecy protections of the laws of the state where the trust is formed, will be totally irrelevant and ineffective.
Some Exemplary Scenarios
The scenarios that follow are based on the following hypothetical: The Settlor domiciled in a state that does not allow self-settled spendthrift trusts ("Non-State") transfers assets from Non-State to a DAPT formed in DAPT-State. Later, Settlor is sued by civil Claimant in federal court sitting in Non-State. Claimant wins judgment against Settlor. Federal judge chooses Non-State fraudulent transfer law to set aside transfer as a fraudulent transfer, or the federal judge determines that the DAPT is void against the public policy of Non-State.
Typically, asset protection cases are hotly contested cases involving competent litigators for both the debtor and creditor. This is because the average controversy does not become an asset protection case. The average case is settled, often with the settlement being paid by an insurance carrier. By contrast, asset protection cases have not settled since they have gone on to judgment, and typically pit affluent individuals seeking to protect their wealthy against determined and often well-financed creditors (and sometimes governmental creditors).
Additionally, asset protection presumes that the creditor is "right" and that the equities are on the side of the creditor. If this weren't the case, it was unlikely that the creditor would have obtained a judgment. Thus, the following scenarios anticipate that a judgment has been entered against the debtor by a judge who has come to believe that the judgment the judge has entered in favor of the creditor was warranted by the circumstances, and that the creditor should be paid on its judgment.
To more directly focus on the issues, it is presumed that the case is in federal court in a Non-State, and arises out from federal law, such as a claim arising under the Securities Act of 1933. Note, however, that many of the results below might still occur if the federal court was sitting in diversity, or if the suit were brought in state court for a claim arising under state law.
Scenario I
Direct FEDERAL COURT Order to Trustee
Relief Granted
Under the broad relief provisions of the Uniform Fraudulent Transfers Act adopted by Non-State, the federal judge enters an order compelling the DAPT Trustee to repatriate the assets to the Non-State.
Possible Effects
The Trustee risks contempt by not repatriating the assets as ordered by the federal judge.
If the Trustee repatriates the assets to the Non-State as required by the federal judge, the Claimant will be able to attach the assets.
Notes
This is a circumstance where an order entered by the courts of Non-State might not have the same power as an order issued by a federal court, since of course the state court's power to enforce its orders stops at its borders (but see the Bank of Nova Scotia scenario below). The powers of the federal courts are, of course, nationwide and not reliant upon the Full Faith & Credit Clause.
Possible Authority
Federal Rule of Civil Procedure 64 ("At the commencement of and during the course of an action, all remedies providing for seizure of person or property for the purpose of securing satisfaction of the judgment ultimately to be entered in the action are available under the circumstances and in the manner provided by the law of the state in which the district court is held, existing at the time the remedy is sought . . ..") (Emphasis added).
Scenario II
Anderson Scenario
The federal judge sitting in Non-State enters an order compelling Settlor to repatriate the assets from the DAPT-State to the Non-State.
Possible Effects
If the Settlor refuses, the federal judge can order Settlor held in contempt for years.
The Settlor might be held in contempt even if the Settlor has no ability to repatriate the assets to the Non-State.
Note
Those held in contempt in relation to FAPTs have consistently denied that they had any ability to repatriate the money from their foreign trusts, for example, but the judges involved have consistently ignored those claims.
A state court judge of Non-State could impose the same remedy.
Analogous Case
Federal Trade Commission v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999) (affirming order incarcerating for six months settlors of Foreign Asset Protection Trust formed in the Cook Islands, with trust formed year prior to settlors' bad conduct, who refused to repatriate trust assets to Nevada; settlors' trust company later paid Federal Trade Commission settlement of $1 million to release trust company only from liability; Federal Trade Commission continues to pursuit settlors on underlying judgment) (this case is popularly known as the "Anderson case", since the Andersons were the settlors who were incarcerated and the real parties in interest in this appeal).
Scenario III
Lawrence Scenario
The Settlor files for bankruptcy, or is forced into bankruptcy, in federal bankruptcy court sitting in the Non-DAPT State. The federal bankruptcy judge determines, under the laws of the Non-DAPT State, that the assets of the DAPT are part of the Settlor's bankruptcy estate. The federal bankruptcy judge enters an order compelling the Settlor to repatriate the assets from the DAPT-State to the Non-State, and to turn the assets over to the federal bankruptcy trustee.
Possible Effects
If the Settlor does not repatriate the assets, the Settlor may be held in contempt literally for years by the federal bankruptcy judge.
The Settlor's discharge may be denied.
The Settlor may be charged with bankruptcy fraud.
The Settlor, the Settlor's Planners in both the Non-State and DAPT-State, and the Trustee, may be charged with conspiracy to commit bankruptcy fraud.
Analogous Case
Lawrence v. Goldberg, 279 F.3d 1294 (11th Cir. 2002) (affirming contempt order incarcerating debtor who had funded asset protection trust in Mauritius and then refused to list assets on bankruptcy schedule of assets or repatriate the assets to Florida; debtor originally incarcerated in 1999 and still incarcerated as of 2002; debtor's discharge denied).
Scenario IV
Bank of Nova Scotia Scenario
The Trustee of the DAPT keeps the trust assets with Coast-to-Coast Brokerage Firm, which has a branch in Non-State (or any Non-State). The federal judge enters an order against the Coast-to-Coast branch in Non-State requiring Coast-to-Coast to turn over the trust assets to the Claimant.
Possible Effects
Coast-to-Coast Brokerage Firm has to provide the assets to Claimant or face contempt and possibly significant fines.
Notes
This result would probably be the same if a court in Non-State ordered the local branch of Coast-to-Coast to turn over the trust assets to the Claimant.
Analogous Case
U.S. v. Bank of Nova Scotia, 740 F.2d 817 (11th Cir. 1984) (order of civil contempt fine of $25,000 per day and total fine of $1,825,000 affirmed against Miami branch of international bank that refused to disclose account records of Bahamas branch of bank to federal grand jury).
Scenario V
Civil Conspiracy Scenario
Claimant files a lawsuit for civil conspiracy under laws of Non-State against Settlor, and Settlor's planners in Non-State, Settlor's planners in DAPT-State, and against Trustee in Non-State. The federal judge finds that personal jurisdiction of DAPT-State Planner and Trustee is proper, insofar as the trust was intended to defeat the rights of creditors (whether known or unknown) in Non-State.
Possible Effects:
Civil conspiracy is an intentional tort. If Claimant's original action was dischargeable in bankruptcy, the effect is that the Settlor has converted a dischargeable action into one that is not dischargeable in bankruptcy.
Settlor's Non-State Planners, Settlor's DAPT-State Planners, and the DAPT-State Trustee become personally liable for underlying judgment against Settlor.
Settlor's Non-State Planners and DAPT-State Planners might be subject to professional discipline for engaging in a civil conspiracy in violation of the laws of Non-State.
The federal judgment for conspiracy against Trustee would be enforceable, despite the DAPT laws of the DAPT State.
Analogous Cases
Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406 (3rd Cir. Appeal No. 02-2087, May 30, 2003). See also 1994 Land Fund II v. Ramur, Inc., No. 05-98-00074-CV (Tex.App. 5th Dist. 2001) (recognizing civil conspiracy theory arising from fraudulent transfer); A.T. Stephens Enterprises, Inc. v. Arnold Johns, 757 So.2d 416 (Ala. 2000) (judgment upheld for civil conspiracy to defraud creditors). Monastra v. Konica Business Machines, 43 Cal.App.4th 1628 (1996) (recognizing civil conspiracy action for defrauding creditors); Summers v. Hagen, 852 P.2d 1165 (Alaska, 1993) (in an action for conspiracy to fraudulently convey property, if the remedy of voiding the transfer is inadequate, the plaintiff is entitled to the lesser of the value of the property fraudulent transferred or the amount of the debt); McElhanon v. Hing, 728 P.2d 273 (Ariz. 1986) (a cause of action lies against a judgment debtor's attorney who conspires with the debtor to defraud the creditor).
SUMMARY
Where DAPTs might work
As lame as the DAPT is as an asset protection tool, it probably has a fair-to-middlin' chance of prevailing in the following circumstances:
First, you actually live in Alaska, Delaware, Nevada or a state that has adopted a similar statute, have all of your assets there, fund the trust well in advance, keep the assets in either property in that state or in banks that have no branches in non-DAPT states, follow all formalities, and avoid federal court actions.
Second, you actually live in Alaska, Delaware, Nevada or a state that has a adopted a similar statute, and you form a Foreign Asset Protection Trust (which, ironically, might stand up to some degree in these states since the Self-Settled Spendthrift Trust anti-public policy argument probably can't be effectively asserted in these states), keep all the assets abroad, and you are willing to flee the country if things get too ugly.
Everybody else should do something else, because for you this probably isn't going to work.
Conclusion
Conceptually, the mere existence of the DAPT is proof that there are serious questions about the FAPT. Many of the planners who used to crow about how "foolproof" the FAPT is (or, rather, was supposed to be), have now fallen off the offshore trust bandwagon in favor of domestic trusts. But don't be fooled by the imitator: While the FAPT has actually been repeatedly blown up in the U.S. courts, and the DAPT hasn't, the offshore trust is still a far superior asset protection method to its Domestic variant -- since at least with an FAPT you can flee the country and your assets are already outside the U.S. Personally, I think that the DAPT is sort of a legalistic "bad joke", unless of course you live in one of the states that allow these trusts, in which case it is simply a tool which, though anemic, is still probably better than nothing. Because of the potential flaws noted above, perhaps the term "Defective Asset Protection Trust" is a better name.
What this foreign/domestic vacillation really tells you is that the guys who make asset protection trusts a "centerpiece", or any major piece of their asset protection plan, are totally confused by the failure of their former-champion, the FAPT, and now really don't have much confidence in anything they are doing with trusts as an asset protection method. But as I stated at the outset of my discussion of trusts, in general trusts are fundamentally lousy asset protection vehicles, and they'd be better to abandon them entirely in favor of the numerous better methods that do work.
Labels: alaska trust, asset protection, asset protection trust, dapt, delaware trust, domestic asset protection trust, nevada trust
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