Domestic Asset Protection Trusts
If you have something worth protecting, it's worth protecting right. Be it a vehicle, a valuable collection, your life savings, or the home you live in, you want to make sure your assets are safe—both for you and for your family.
How asset protection trusts work—and how they don't
Asset protection trusts can be powerful, useful, and safe, when done right. However, a surprising number of firms and attorneys market asset protection trusts with ignorance of or disregard for the relevant court cases. One such example is that of a law firm that recently prepared an Alaska Asset Protection Trust for a Montana resident without knowing that that structure failed to protect the assets in a recent court case (in the courts of both Montana and Alaska). Other law firms market offshore trusts to protect onshore assets while completely ignoring the court cases showing that this dynamic leaves those assets vulnerable (even after what amounts to great cost and administrative headache for the client).
This phenomenon further complicates a world and industry that are already rife with confusion and lack of specialization. With so many types of attorneys, opinions, and asset protection trusts out there, how do you know which ones you can trust to be both honest and effective?
At McCullough Law, our clients and their goals, objectives, and legacies are our biggest priorities. We build asset protection trusts based on statutory law and relevant court cases, tailoring each trust with the firm belief that each individual deserves an equally individualized asset protection trust. While we have other methods of asset protection, we also take full advantage of DAPT statutes that make Utah Domestic Asset Protection Trusts (UDAPTs), as well as those from other DAPT-friendly states, potent, and in such a way that maximizes their strength when challenged.
How do I know if a Domestic Asset Protection Trust is right for me?
There are many factors to consider. Here are some key questions to ask yourself:
- Which state is your primary residence?
- Do you have plans to move to, do business in, or own property in another state in the near future?
- Are you married or single?
- Do you have a trusted family member to serve as trustee, or do you prefer a professional trustee?
- Do you have a high risk of liability based on your profession or personal life?
- What are the types and locations of the assets that you are trying to protect?
An honest, well-qualified attorney will consider all of this not only in determining the optimal structure for your estate, but in the specific details while crafting your asset protection trust.
Pros and Cons
If you're considering creating an estate plan in Utah, you should have the facts you need to make an informed decision. Here are some pros and cons to consider when you and/or your asset protection lawyer are thinking about a potential UDAPT:
Pros:
- A settlor can create an irrevocable trust and transfer assets into it. Utah law provides that the settlor's creditors can't get the assets, even if the settlor is also a beneficiary (so long as there wasn't a fraudulent transfer into the trust).
- There's no limit on the amount of assets transferred into the trust (so long as the transfer doesn't make you insolvent).
- The trust can allow the settlor to live in a residence owned by the trust without exposing the property to creditor claims.
- The trustee can be a Utah resident or a professional/institutional trustee.
- The settlor can act as a co-trustee with authority to manage the trust assets in all respects other than to make distributions to beneficiaries.
- The trust offers immediate protection from creditors that arise AFTER a transfer into the UDAPT. There's no statute of limitations waiting period to protect from claims of future creditors.
- The relatively short two-year statute of limitations period for pre-existing creditors can be reduced to 120 days by notifying creditors.
Cons:
- The Federal Bankruptcy Code disfavors self-settled trusts under Section 548(e), which allows the trust assets to be subject to the bankruptcy within the first 10 years after transfer to the trust. DAPT statutes are relatively new and, in what little history there is so far, DAPTs have failed to protect assets in cases of bankruptcy.
- While Utah and 14 other states have DAPT statutes, if you get sued in a state that doesn't allow DAPTs (such as California), the creditor might be able to get a judgment against the trust under the laws of that non-DAPT state. There are several court cases showing that other states can and do apply their own laws as opposed to those where the trust was formed, which leaves the UDAPT vulnerable if you're sued in a state that does not allow DAPTs.
Also consider:
- Taxes. We can design a trust that's taxable to the settlor, to one or more beneficiaries, or to the trust itself. If you're seeking help with estate planning in Utah and someone tells you that they can design a trust that avoids all taxes, you may want to get a second opinion.
- Family considerations. Trusts can be designed to help minimize the risk of contention over your estate, such as to prevent children from being spoiled with too much unrestricted money or to keep assets in the family for more than one generation.
- Cost and complexity. Some plans involve considerable trustee fees, accounting costs, and confusing tax compliance rules, while others are simpler and much easier to operate. These decisions are often affected by the amount of wealth being protected and the risk of liability you face.
The question isn't whether or not you need asset protection—it's how to do it effectively, and in a way that best suits you, your circumstances, your life, and your goals. McCullough Law is here to help you achieve that.