Nobody wants to be sued

Alexander A. Bove Jr. and Melissa Langa
BridgeTower Media Newswires

No one wants to be sued, and everyone would feel better if they knew their assets would be protected if they were sued. It is common knowledge that we live in the most litigious country in the world. There are more lawyers in southern California than in the entire country of Japan.

A lawsuit is initiated every 15 seconds in the U.S. Such an atmosphere has motivated a considerable segment of the public to go to some lengths to protect their "nest egg," even to the point of moving it out of the country. Is that necessary? Isn't it possible to protect it while it's here

In fact, beginning around the '70s and '80s, so much money was leaving the U.S. to go to places like the Cook Islands, the Bahamas and Gibraltar that U.S. banks and many legal professional groups began to push hard for the adoption of laws that could offer the same protection here that was being found offshore.

As a result, in 1997, Alaska, followed quickly by Delaware, became the first states formally to adopt laws that would allow a person to establish a trust for her own benefit, the assets of which could not be reached by creditors. It is referred to as a self-settled domestic asset protection trust, or DAPT.

For many years (about 200 or so) the establishment of such trusts was seen as against public policy, but that viewpoint has relaxed considerably, evidenced by the fact that the bold move by Alaska and Delaware in 1997 has since been followed by 17 other states: Connecticut, Nevada, South Dakota, Ohio, Missouri, New Hampshire, Rhode Island, Tennessee, Wyoming, Hawaii, Indiana, Michigan, Mississippi, Utah, Oklahoma, Virginia and West Virginia (the most recent - just a couple months ago - being Indiana and Connecticut).

Of course, the various state DAPT statutes differ somewhat, but following is a brief description of the basics and some of the distinctions among the states' laws, as well as an overview of the laws of the most recent additions, Indiana and Connecticut, with the hope that this will assist lawyers in advising clients on selection of a jurisdiction, if a DAPT is deemed the appropriate choice.

For openers, there are five requirements common to all 19 DAPT states that the DAPT must follow:

1) The trust must be irrevocable - irrevocable by the settlor, that is. The power to revoke can be given to other parties, such as the trust protector;

2) The trust must have a local trustee (but it could also have a co-trustee elsewhere, such as in the settlor's domiciliary state - generally a bad idea);

3) Some of the trust assets must be located and administered in the DAPT state;

4) The trust must provide that its governing law is that of the DAPT state;

5) The trust must contain a spendthrift provision (prohibiting attachment or reach by creditors or assignment by the beneficiaries).

Those are the basics. From here there are a few additional provisions that vary from state to state and that are seen as important by "experts" in assessing the desirability of one state's DAPT over another. They include:

- The period (statute) of limitations within which an action must be brought to challenge a transfer to the trust;

- "Exception creditors" (such as ex-spouses collecting alimony, child support obligations, and tort creditors), if any, whose claims override the protection of the DAPT;

- The level of the creditor's burden of proof in challenging a transfer to the DAPT as "fraudulent," meaning prejudicial to the creditor.

One of the most significant considerations is the statute of limitations, which runs from 18 months in Ohio (currently the shortest) to five years in Virginia (the longest). Almost half of the rest is four years, including Connecticut; and the other half, now joined by Indiana, is two years.

In virtually all the statutes the burden of proof to establish a fraudulent transfer is by "clear and convincing evidence," while Connecticut cut that liberal standard down a bit by requiring proof only by a "preponderance of the evidence" if the transferor is also a beneficiary of the DAPT, which would in fact typically be the case with a self-settled DAPT.

The idea of a period of limitations makes sense in some respects, as it would lead to chaos and widespread uncertainty in commerce and property ownership if creditors could surface and make a claim 10 or 20 years after the claim arose.

But, in fact, that's the way it used to be to prevent debtors from simply giving away their property to avoid creditors. In 1570, Queen Elizabeth passed a law that allowed creditors to lay claim to the transferred property at any time after the transfer, without limitation (called the "Statute of Elizabeth," which is still a law in some jurisdictions).

Of course, a reasonable limit on the open period developed, but what is reasonable? If some states, in an effort to attract more DAPT business, decide that 60 or 90 days is sufficient, would that create still another trend? Could a court ignore an unreasonably short period?

Exception creditors are the next important consideration. They are creditors whose claims take priority over the protection offered by the statute. Typically, these are claims existing at the time the DAPT was created, for child support, alimony or marital settlements, which is the law in a majority of the DAPT states.

Currently, only Nevada, Utah and West Virginia have no exception creditors.

There are other requirements in establishing a DAPT, varying from state to state, but the foregoing are the essentials, meaning - theoretically, at least - that an individual could transfer a substantial portion of her assets to a DAPT (we should note that many advisors recommend not more than 30 or 40 percent), and if there are no claims made within the open period of limitations, these assets would be protected from the reach of creditors.

Meanwhile, she could receive whatever payments and other benefits, such as the use of property that may be in the trust, without fear of a creditor's attack. At least that's the plan.

As more states adopt DAPT laws and more DAPTs are established, more laws will no doubt develop, but at the moment there are relatively very few reported cases across the country. This could be good news, however, for settlors of the DAPTs. Many advisors speculate that this is a sign that creditors who confront such trusts do not want to go to the huge expense to test the law, with no guarantee of success, and therefore will be inclined to settle.

Furthermore, there are discussions among legal organizations of establishing a uniform asset protection trust law, which could help unify the laws across the country. But whether or not that occurs, we can unequivocally say that times and concepts have changed, and estate planners need to be mindful of that.

Given the growing trends of the states to adopt DAPT laws, when we get to the "full monty" where all 50 states have DAPT laws, it may become borderline negligent for estate planners not to consider a DAPT in every estate plan.

When that happens, if people could really rollover in their graves, Queen Elizabeth would be in the likes of a spin class.


Alexander A. Bove Jr. and Melissa Langa are shareholders at Bove & Langa in Boston, where they concentrate in domestic and international trust and estate law.

Published: Mon, Nov 25, 2019