Being aware of the fact that general U.S. trust law will not be effective to protect trust assets from a settlor-beneficiary’s creditors, and seeking to obtain potential trust business, the legislatures of a number of states (nineteen as of January 1, 2020) – most notably Alaska, Delaware and South Dakota, have enacted varying degrees of asset protection trust legislation. These domestic asset protection trusts are referred to as DAPT’s.
Generally, such legislation purportedly permits a settlor of a trust to be a discretionary beneficiary of a trust and obtain the desired asset protection advantages (that is, the above-mentioned general ineffectiveness should not apply). For numerous reasons, the effectiveness of such domestic asset protection laws is highly questionable. In the Huber case (2013), a Washington state resident established an Alaska asset protection trust. The settlor ended up in a federal bankruptcy court in Washington state, and, not surprisingly, the trust failed to protect the his assets for a couple of reasons. First, the federal court held that Washington law (which does not permit asset protection trusts) applied, thus, no protection was available for Mr. Huber – because the federal bankruptcy court could order the Alaska trustee company to give back the assets. Second, and very importantly, section 548(e)(1) of the bankruptcy law permits the bankruptcy court to undo any such trust for a period of ten years after it is established, and so it was.
These rules were effective to dismantle the Alaska trust for one reason: the Alaska trustee – who held title to trust assets – was subject to the jurisdiction (power) of the U.S. court system. This means that the Alaska trustee (or any other U.S.-based trustee) had to comply with the order of the federal court or be held in contempt.
The result: No protection.
The solution: Implement a properly structured offshore asset protection trust to be certain that the planning will be effective. Why does the offshore trust work? Very simply, if the offshore trust is properly structured, no court in the U.S. will have the power to “get at” the trust’s assets – period. Properly structuring the offshore trust includes utilizing competent, experienced counsel.