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In Rush University v. Sessions, et al, the Illinois Supreme Court ruled that a transfer to a Cook Islands trust was per se fraudulent.   Despite the holding, since the grantor was deceased and therefore could not be held in contempt of court, the trust would probably have worked to protect the assets had the assets not been located in the U.S.  In this case, however, the trust owned millions of dollars of Illinois real estate, over which the court has jurisdiction, of course.

As explained in this Forbes article by attorney Jay Adkisson, this ruling could spell bad news for the effectiveness of domestic asset protection trusts more so than offshore trusts.  Adkisson's view:

"(1) With some exceptions, Foreign Asset Protection Trusts can be effective if the Settlor/Beneficiary and all assets are beyond the reach of the U.S. courts. So long as those two conditions prevail, contrary U.S. law probably will not be of practical benefit to the creditor. But Foreign Asset Protection Trusts might not be effective as to trust assets found in the U.S. (as here), or if the Settlor/Beneficiary remains within the contempt power of the Court.

(2) With some exceptions, Domestic Asset Protection Trusts can be effective if all of the trust assets are held in a DAPT state. But Domestic Asset Protection Trusts might not be effective as to assets held in a non-DAPT state.

(3) While not considered in this Opinion, Bankruptcy Code section 548(e) casts a dark shadow over all “self-settled trusts and similar devices” to the extent that the Bankruptcy Petition is filed within 10 years of the date of transfer.

To summarize as to Domestic Asset Protection Trusts: They “work” so long as your assets are kept in a DAPT state and you can stay out of bankruptcy for 10 years. There is an open question as to whether the courts of a non-DAPT state can compel the return of asset from the DAPT state to the non-DAPT state so that those assets are available to creditors, i.e., the application of “Anderson relief” to DAPTs."

For North Carolina residents, this means that assets held in North Carolina, especially real estate, are unlikely to be afforded much protection by either foreign or domestic asset protection trusts.  Even assets located elsewhere may at risk.  My advice for those seeking protection - plan carefully, with multiple strategies, and do so now!

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In the May 26, 2011 Alaska Bankruptcy Court decision of In re Mortensen, the court avoided a transfer of real property of the debtor to an Alaska Domestic Asset Protection Trust (DAPT).  The judge held that under Section 548(3) of the Bankruptcy Code, any transfer to a DAPT for less than full and adequate consideration is, by definition, with the intent to "hinder, delay, or defraud" creditors despite state law providing otherwise, and that such DAPT asset are part of the bankruptcy estate if made within the 10 year look back period in Section 548(e)(1).  548(e)(1)(D) states that the intent to defraud relates to future potential creditors as well as any present creditors: "the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted." [emphasis added]

Although this case was decided in Bankruptcy Court in Alaska, there is no reason to doubt that the decision would be any different in North Carolina or any other state as it hinged on federal, not state, law.

Bottom line is do whatever you can to avoid filing bankruptcy within 10 years of funding a DAPT.  Also make clear that any other applicable reasons for the DAPT, such as estate tax planning, are well-documented.  Finally, don't try to do the legal work yourself!

For those interested, here is a copy of the Complaint filed by the Bankruptcy Trustee, along with related Motions.  Below are some pertinent facts, nicely outlined by Alaska attorney Richard Foley:

• The debtor is a geologist/engineer. The debtor tried to do most of his legal work himself when he established the trust and filed for bankruptcy.

• The debtor drafted his own trust. Although he consulted with an attorney to review the trust document, the legal analysis of doing this trust was apparently minimal.

• The debtor initially filed his own petition in bankruptcy without consulting with a lawyer. Prior to filing the petition, it is doubtful the debtor understood the issues regarding the 10-year bankruptcy statute of limitations on DAPTs.

• Much of the debt in this case was credit card related. It is likely there was an opportunity for credit-card workout arrangements other than filing bankruptcy.

• Prior to the creation of the DAPT, the debtor had come off a contentious divorce and his income had been sporadic. He had credit card debt at the time the DAPT was created which became worse over time. Between the divorce, the sporadic income and existing credit card debt, the court had sufficient facts upon which to reach the conclusion that the trust was intended to hinder, delay or defraud future creditors.

• After a notice of appeal was filed, the parties settled. The debtor received financial help from other family members and the debtor “purchased” the property from the bankruptcy trustee for the tax assessed value.• This property is located in Seldovia, a picturesque fishing community that is not accessible by road. It has become a popular “get-away” spot for tourists and city dwellers in Anchorage. The debtor really did want to protect this property for future generations and was willing to pay money to the trustee to make sure it was not lost.
 

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Nevada’s new  Domestic Asset Protection Trust (DAPT) laws became effective October 1, 2011. One new feature is the ability to move a DAPT that was established in another state to Nevada without having to start the statute of limitations period over.

For example, say you set up a DAPT in a state where there’s a four-year waiting period for protection, where the law expressly allows a divorcing spouse to pierce through the trust, and/or  permits a pre-existing tort creditor to pierce through the trust.  You can now transfer that trust to Nevada to take advantage of Nevada's more protective laws without having to re-start the waiting period for protection to begin.

At two years, Nevada's waiting period is the shortest, and it is the only state with no "exception" creditors.  Check out Steve Oshin's Domestic Asset Protection Chart for an up-to-date comparison of DAPT jurisdictions.

DAPTs do require use of a trustee in the jurisdiction in which the trust is established, but they can be used by residents of any state. Protection against court challenges for non-residents may be somewhat uncertain, but DAPTs are increasingly popular with real estate developers, physicians, and others concerned about future creditors.  They are normally used in conjunction with Limited Liability Companies to provide another level of protection and more control to the trust grantor.

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