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Domestic Asset Protection Trusts: Are They Really As Safe As Advertised?

Posted by James Burns | Oct 15, 2024 | 0 Comments

When it comes to protecting your wealth, you've probably heard about Domestic Asset Protection Trusts (DAPTs). They sound like the perfect solution, right? You get to tuck away your assets in a trust, and voilà—your money is safe from creditors, lawsuits, and other financial threats. But here's the thing: while DAPTs do offer protection, they're far from bulletproof.

Let's break it down together. We'll explore what DAPTs are, where they're available, and most importantly—why they might not be the ironclad shield they're advertised as. And if you're really serious about asset protection, I'll show you how foreign trusts may be a more powerful option.

So, What Exactly Is a DAPT?

A DAPT is a type of trust that allows you to be both the trust's creator (or "settlor") and its beneficiary. In other words, you put your assets into the trust, and while someone else (a trustee) manages them, you can still receive distributions. All the while, the idea is that your assets are protected from creditors and lawsuits.

Seems like a win-win, right? Well, it depends.

Where Can You Set Up a DAPT?

DAPTs are only available in certain states—17, to be exact. These include places like:

  1. Alaska
  2. Nevada
  3. South Dakota
  4. Delaware
  5. Wyoming
  6. Utah
  7. Ohio
  8. Missouri
  9. Rhode Island
  10. Mississippi
  11. Tennessee
  12. New Hampshire
  13. Hawaii
  14. Oklahoma
  15. Virginia
  16. Michigan
  17. Indiana

These states have special laws that allow DAPTs, but not every state does. If you live in one of these states, you might be able to set up a DAPT under your state's laws. But even if you live elsewhere, some states will let non-residents set up trusts. The catch? The protections might not be as strong if you don't live in that state, especially if creditors from your home state come knocking.

The Hidden Vulnerabilities of DAPTs

On paper, DAPTs sound fantastic—who wouldn't want a legal way to protect their assets while still benefiting from them? But in practice, they're often more vulnerable than people realize.

Let me share some examples of how DAPTs have failed when tested in court.

Case #1: Alaska—Toni 1 Trust v. Wacker (2014)

Imagine setting up an Alaska DAPT thinking your assets are safe and sound. Now, picture a creditor from another state—say, Montana—coming after your assets. You'd expect Alaska's strong trust laws to shield you, right?

Well, that's not what happened in the Toni 1 Trust v. Wacker case. The Alaska Supreme Court ruled that because of the Full Faith and Credit Clause of the U.S. Constitution, Alaska had to honor a Montana court's ruling. The result? The assets were exposed, and the creditor could access them.

Lesson: Even with a DAPT, an out-of-state creditor can potentially break through your asset protection if they have a court judgment from another state.

Case #2: Nevada—Klabacka v. Nelson (2017)

Let's take Nevada next. Known for its pro-business, pro-asset protection stance, Nevada allows some of the strongest DAPT laws in the country. But even Nevada's laws couldn't protect the assets in the Klabacka v. Nelson case.

Here, a spouse tried to use a DAPT to avoid spousal support payments after a divorce. The court didn't buy it. They ruled that spousal support claims—an exception creditor under Nevada law—could breach the trust. In short, the ex-wife was able to access the DAPT assets to satisfy the support claim.

Lesson: DAPTs can't protect against certain claims like spousal or child support—even in Nevada.

Case #3: South Dakota—In re Cleopatra Cameron Gift Trust (2020)

In South Dakota, another state famous for its trust-friendly environment, we saw a similar problem. In In re Cleopatra Cameron Gift Trust, a California creditor pursued assets in a South Dakota DAPT. The South Dakota Supreme Court had no choice but to enforce the California judgment under the Full Faith and Credit Clause.

Lesson: Even the best DAPT laws in places like South Dakota can be overruled when out-of-state creditors are involved.

Case #4: Alaska—In re Mortensen (2011)

Here's another big risk: bankruptcy. In In re Mortensen, a man set up an Alaska DAPT to protect his assets, but then filed for bankruptcy within two years. The court found that the transfer to the trust was a fraudulent conveyance and ruled that the assets had to be pulled back into his bankruptcy estate. This was possible because of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which allows a 10-year lookback period on transfers to self-settled trusts like DAPTs.

Lesson: If you're facing bankruptcy, the courts may claw back assets from your DAPT, even if you transferred them years before.

Are DAPTs Still Worth It?

So, are DAPTs still useful? Absolutely. For many people, they offer good protection, particularly for shielding assets from certain types of creditors. But as we've seen, they're far from perfect. If you're dealing with out-of-state creditors, family law claims, or bankruptcy, your DAPT might not be enough.

That's where foreign asset protection trusts (FAPTs) come in.

Why Foreign Asset Protection Trusts (FAPTs) Might Be a Better Option

If you're serious about asset protection, you might want to look beyond U.S. borders. Jurisdictions like the Cook Islands, Belize, and the Cayman Islands have asset protection laws that are far stronger than what you'll find in any U.S. state.

Key Benefits of Foreign Trusts:

  • No Full Faith and Credit Clause: These jurisdictions aren't obligated to honor U.S. judgments. That means a creditor would have to start an entirely new legal process in the foreign country to even try to reach your assets—and it's much harder for them to succeed.

 

  • Shorter Statutes of Limitations: In the Cook Islands, for example, creditors only have one year to challenge a transfer. After that, the assets are typically untouchable.

 

  • Higher Burdens of Proof: In places like the Cook Islands, creditors need to prove beyond a reasonable doubt—the same standard used in criminal cases—that the trust was set up to defraud them. That's an extremely tough hurdle to clear.

A Real-Life Example

Let's say you're a business owner with significant assets, and a lawsuit is filed against you. If your assets are held in a Cook Islands trust, a U.S. court might issue a judgment in favor of the creditor, but the Cook Islands won't automatically enforce that judgment. The creditor would have to sue you in the Cook Islands under the local laws—and in most cases, they won't even try, because the chances of success are so slim.

Why Work with the Law Office of James Burns?

At the Law Office of James Burns, we have over 24 years of experience helping clients navigate the complexities of asset protection, both domestically and internationally. Whether you're considering a DAPT or exploring foreign asset protection trusts, we can guide you through the options to help safeguard your wealth.

If protecting your assets is a priority, contact us today at [Contact Information] to schedule a consultation. Let's work together to build a strategy that works for you, whether here in the U.S. or abroad.

About the Author

James Burns

James Burns, Esq. is a seasoned attorney specializing in estate planning, asset protection, and tax law. Known for his expertise in Private Placement Life Insurance (PPLI), James helps high-net-worth individuals protect their wealth and achieve tax efficiency, including pre-immigration planning. With over 20 years of legal experience, he offers tailored solutions for estate planning and corporate transactions. James is also a published author and sought-after speaker, recognized for his deep knowledge and strategic approach to wealth preservation.

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