For a decade and a half there were no court opinions upholding challenges to domestic asset protection trusts (“DAPT’s”). Indeed, there were no decisions at all. This lack of jurisprudence gave asset protection planners renewed confidence to consider using DAPT’s when clients sought protection against future creditor claims.
In 2013, the Huber case was decided, and very recently the opinion in the Dahl appeal was issued. Although both cases involved DAPT’s their facts are very different and the class of creditor attacking the trusts were also different. In Huber, we have a bankruptcy trustee suing on behalf of typical third-party creditors, while in Dahl we have a spouse challenging the trust in connection with a divorce proceeding. Though quite different, both decisions include a finding that the choice of law provision in the respective trust documents (Alaska and Nevada) is not controlling and instead the courts applied the law of the forum state. Although the courts arrived at their decisions using different approaches, the common thread was that the law established in the trust document was in conflict with a substantial public policy of the forum state.
The impact of these decisions was catastrophic to the settlors whose common goal was to keep the assets of their DAPT’s outside the reach of their creditors (whether they be bank lenders enforcing guaranties or divorcing spouses seeking to augment the marital estate).
In response to Huber (note that Dahl did not involve a challenge to a self-settled trust), it now behooves asset protection planners to anticipate a challenge to self-settled spendthrift trusts when the settlor is a resident of a non-DAPT state. It is in this connection that it is worthwhile to revisit Steve Oshins’ strategy of creating what he calls a Hybrid Domestic Asset Protection Trust (“Hybrid Trust”).
The Hybrid Trust is drafted as your typical DAPT except that the settlor is not named as a beneficiary. In this way the trust is a typical irrevocable spendthrift trust for a spouse and descendants. It can be established to avoid inclusion in the estate of the settlor by insuring the contribution is a completed gift for gift tax purposes or planning for inclusion in the settlor’s estate by making the contributions incomplete for gift tax purposes. In either situation, assuming there are no fraudulent transfer claims, the trust should be bulletproof in terms of the settlor’s creditors accessing the trust as this would be a classic third party spendthrift trust.
Following the establishment of the trust, if an unsuspected creditor problem arises with respect to the settlor, by making distributions to settlor’s spouse, the settlor can indirectly benefit (home payments and other living expenses can be paid by the spouse for the couple’s benefit). Obviously having a strong and trusting marriage will be critical for this type of planning. Moreover, the spouse should be defined as the person married to the settlor from time to time.
The flexibility of the Hybrid Trust comes about by allowing the trust protector or distribution advisor to add or eliminate beneficiaries. Accordingly, the settlor may be added as a beneficiary if, for example, at some point settlor has no spouse or trustworthy child. At that time, the Hybrid Trust becomes a typical DAPT with all of the inherent risks. Of course, the trust protector can remove the settlor as a beneficiary at any time where it is anticipated that a creditor may attack. The removal should occur as early as possible to avoid the inevitable creditor claim that the trust should be categorized as a typical DAPT rather than a third-party creditor trust.
If you feel that you might benefit from consulting with an asset protection planning attorney, please feel free to contact me.