Salvation for Domestic Asset Protection Trust?

A Domestic Asset Protection Trust (DAPT) is a type of trust that allows you to protect assets that are held for your own benefit. These trusts are irrevocable and they have spendthrift provisions. That simply means that the assets held in a DAPT are not available to creditors of the beneficiaries (who, in this case, are also trust creators). There is one big problem with Domestic Asset Protection Trust. Namely, most states do not have statutes that allow for creditor protection or spendthrift provisions in self-settled trusts.

In other words, the law in most states is that if you create a trust for your own benefit, then assets held in the trust can be accessed by your creditors. For instance, California Probate Code section 15304 provides the following:

(a) If the settlor is a beneficiary of a trust created by the settlor and the settlor’s interest is subject to a provision restraining the voluntary or involuntary transfer of the settlor’s interest, the restraint is invalid against transferees or creditors of the settlor. The invalidity of the restraint on transfer does not affect the validity of the trust. (b) If the settlor is the beneficiary of a trust created by the settlor and the trust instrument provides that the trustee shall pay income or principal or both for the education or support of the beneficiary or gives the trustee discretion to determine the amount of income or principal or both to be paid to or for the benefit of the settlor, a transferee or creditor of the settlor may reach the maximum amount that the trustee could pay to or for the benefit of the settlor under the trust instrument, not exceeding the amount of the settlor’s proportionate contribution to the trust.

Asset protection laws in California, Texas, Florida, New York, and New Jersey do not provide protection for assets held in self-settled DAPT trusts.

Domestic Asset Protection Trust States

The laws of some states do, however, protect assets held in self-settled spendthrift DAPT trusts. These states include Tennessee, Ohio, Wyoming, Nevada, and Alaska. If you live in one of these states, then you can put your wealth into a DAPT to protect assets, so long as the creation and funding of the asset protection trust is not a fraudulent transfer. What if you don’t live in DAPT state? Can you still take advantage of the laws of states that offer domestic asset protection trust statutes? The answer is “maybe.” The problem is that laws of the state where you live typically apply to situations where creditors are trying to access your assets. Again, since most states don’t recognize DAPTs, in most cases you’ll be out of luck.

Getting DAPT Laws to Apply and Protect

There is one obvious way to get around this issue. One can simply move to the DAPT state where their asset protection plan was formed prior to the time when creditors attempt to execute on a judgment. In that case, it’s likely that a DAPT will be upheld. Another interesting theory is to create a domestic asset protection trust, place assets under the control of a trustee in the state with DAPT legislation, and create the DAPT with language that prohibits removal of the assets from the DAPT state.

This is an interesting concept that has yet to be tested in court. In a sense, this potentially gives domestic irrevocable trusts the same level of protection as offshore trusts. What’s clear is that assets in a non-DAPT state can’t readily be protected. In other words, if you own a house or have cash in a bank account in a non-DAPT state, the courts in the non-DAPT has jurisdiction over those assets and are very unlikely to apply rules in favor of asset protection.

A recent theory has been going around that if a creditor seeks to enforce a judgment against property located in a non-DAPT state (let’s say Texas), which is owned by a trustee in a DAPT state (e.g. Wyoming), the trustee could commence an action for a Declaratory Judgment in the DAPT state. In that scenario, if the trustee “wins first” (i.e. if the trustee obtains the Declaratory Judgment before the creditor can execute on the property in the non-DAPT state) , then the Declaratory Judgment can be domesticated in the non-DAPT jurisdiction. Then, under the Full Faith and Credit Clause of the U.S. Constitution, the non-DAPT state would be forced to honor the judgment.

Problems with Declaratory Judgments and DAPTs

There are two problems with this theory:

  • Lack of personal jurisdiction, and
  • Federal Anti-Injunction Act

First, in order to obtain a Declaratory Judgment in a DAPT state, the DAPT state itself would have to legally be able to exercise personal jurisdiction over the creditor. In many (if not most) cases, that will be easier said than done. Then, even if personal jurisdiction can be established, the creditor could make a motion to remove the case to Federal court, in which case 28 U.S.C. § 2283 would prevent any sort of declaratory judgment from being entered, as it provides:

A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.

I’m aware of at least one case where section 2283 was successfully used by a creditor in an asset protection context. So the use of a Declaratory Judgment in this scenario isn’t really interesting, since there are too many problems with involving the creditor. What is interesting is the idea of using a declaratory judgment vis-a-vis the beneficiary of a DAPT and the trustee.

In other words, if the beneficiary (and creator) of a properly created trust institutes a declaratory action against his or her own trustee for a distribution of assets to the creditor in the DAPT state, then that declaratory judgment could potentially be domesticated in the non-DAPT state, which would keep the beneficiary (you) from a contempt of court finding and protect your assets.

Privacy and Asset Protection

It’s no secret that the U.S. Treasury Department is in a war against money laundering. One method of cracking down has been to impose stricter disclosure requirements for owners and beneficiaries of bank and financial accounts, especially offshore accounts. This creates obvious privacy concerns.

While Federal regulators have backed off the most burdensome proposals, proposal that would have required banks to disclose the identities of anyone operating or benefiting from specific bank accounts. Even the less onerous rules that require only self-disclosure by customers raise serious questions over the ability for anone to have or maintain privacy for business or personal reasons.

Privacy and Asset Protection Behind the Corporate Veil

While he specifics are still being discussed, it is likely that a final policy will be enacted by the end of this year. One thing seems clear: Federal Regulators are likely to insist that banks disclose the names of the beneficial owners of business entity bank accounts. At least one version of the rule would require identification of (i) anyone with at least 10% ownership stake in a company, and (ii) managers who oversee operations of the company.

This has major implications for asset protection purposes. Right now, one can gain at least some level of anonymity by using the corporate veil. Increased disclosure seems pointless in light of the fact that the U.S. Treasury Department already obtains information on individuals through tax filings and when people apply for employer identification numbers. The SEC also gets a lot of information on business owners (10% or more) through Form D filings. How much duplicitous information does the Federal government want us to provide? At this point, disclosure requirements are already burdensome for small business owners.

The Federal government obviously needs information in order to combat money laundering, but the proposed rules open a larger debate about the proper use of information, especially as it pertains to privacy and asset protection. In my opinion, privacy is a legitimate component to many asset protection strategies, business deals, and personal financial planning?

The prevalence of frivolous litigation, lawsuits targeted at people and companies with “deep pockets,” and aggressive marketing practices of financial institutions, what additional levels of disclosure should be required at this point? And what forms of protection will that loss of privacy and asset protection leave for individuals and companies looking for legitimate ways to protect themselves from interventional government overreaching and groundless civil lawsuits?

For additional information, see this article from the Wall Street Journal.

Asset Protection: What You Must Know

If you have questions about asset protection, please call me, Wayne Patton, directly at (877) 727-1092 . . . .

The New American Dream

There is a New American Dream spreading across the nation. Achieving this dream has nothing to do with education, hard work, ingenuity, or taking smart risks. No, the New American Dream is based on a sense of entitlement or a feeling that one is a victim, and the road to achieving this dream is paved with lawsuits.

If you are a medical professional, an entrepreneur, or a business owner with employees, you are at risk of being targeted in a lawsuit. The more successful you are, the higher your risk. So how can you protect assets from lawsuits?

Two Systems of Asset Protection

Like the tax code, there is a system of asset protection for the informed, and there is a different system for the uninformed. The informed system of asset protection begins by asking “Which of my assets are in need of protection?” and “What do I want out of my assets?”

To answer the first question, you need to do an analysis of your assets to determine (i) which ones are actually assets (i.e. which ones have enough equity to make them worth protecting), and (ii) which ones are not already protected as exempt assets (e.g. homesteads in Florida and Texas have automatic asset protection).

The second question–“What do I want out of my assets?”–might seem a little bit confusing, but most of my clients boil it down to a few things:

  1. Control of the assets. Ability to decide what, when, where, and how assets are used.
  2. Legacy, or the right to designate where assets go when you die.
  3. Leverage, or the ability to sell, transfer, or mortgage assets and turn them into cash today.

Notice that “legal title” isn’t on the list. Asset protection is about separating control and use of assets from legal title to the assets. That way, if you get sued personally, your assets are off limits, since the legal system can only take assets from you if you hold legal title. The legal system cannot take away your right to control and use assets. 

The Key To Protecting Wealth

Asset Protection Trusts are designed to give you maximum use and control of your assets while separating legal title from your potential legal exposure. It is the ultimate form of diversification and wealth protection, and the good news is that your assets can, for the most part, stay right here in the United States and remain under your full control.

If you would like to learn more about setting up an asset protection strategy, please call me today at (877) 727-1092 or email me directly at Wayne [“at”]

Asset Protection And The New American Dream

The New American Dream

In case you haven’t noticed, there is a New American Dream. This dream isn’t the one instilled in us by our parents and grandparents. It isn’t what Nathaniel Hawthorne was likely talking about when he wrote that “Families are always rising and falling in America,” even though this dream does enrich some at the expense of others. The New American Dream isn’t a reward for educated risk-takers who use ingenuity and elbow grease to carve success for themselves.

Nor is this New American Dream rooted on the Puritan ethic embodied in Captain John Smith’s “He who does not work, will not eat.” It isn’t based on ingenuity or “working smarter” either.

No, the New American Dream is an insidious epidemic. It’s a free ride for the people who achieve it, but the toll exacted from the people who pay for this dream–the families that are “falling in America”–is enormous. The new American Dream is to become wealthy by lawsuit. The idea is to take from those who have achieved and give to those who are “victims.”

Does that sound ridiculous? Well, it should sound ridiculous. I certainly think it’s ridiculous, but no matter what any of us think, no matter how strongly we subscribe to traditional notions of achieving success, we must out of necessity act to protect ourselves against lawsuits. To really understand the need for protection against this New American Dream–the need to protect your assets against lawsuits–you need to understand the mentality of people who file lawsuits and the strategies pursued by the attorneys they hire.

What Does It Take to Achieve The New American Dream?

Not much. You and I know that self-development takes hard work, discipline, and dedication. Sadly, the reason so many people pursue the New American Dream is that it’s easy. Doesn’t it seem that more and more people are just interested in getting by these days? Many people are happy just to survive while leaving all the hard work to someone else. These people aren’t interested in self-development or growth. They have a sense of entitlement or a belief that they are victims. There are a lot of these people, up to 47% of the U.S. population if you take Mitt Romney’s word for it (recently named Quote of the Year for 2012 by Yale University), though the issue isn’t political at all.

Within this group, there is a certain subset that follow the New American Dream by looking for lawsuit windfalls.

All one needs is a sense of entitlement or the idea that a wrong has occurred and a target to sue. We all know that you can’t turn on the television or drive five miles on practically any major road without having a personal injury attorney advertisement tell us precisely that: “YOU have been wronged, and YOU are entitled . . . .”

After that, the task is simple. Sit back, let the plaintiffs’ lawyers do their thing, and collect a judgment or settlement.

Asset Protection For The Informed

Like most things in life, there is more than one solution to this problem. One idea is to reform the legal system in various ways. For example, we could institute a “loser pays” rule and eliminate contingency fees (e.g. attorneys who take a percentage of winnings in lieu of fees). Of course, since legislative bodies can’t seem to agree on anything these days, the idea of reform does little to protect your wealth today, and the powerful trial lawyers lobby works hard to make sure that meaningful legal reform never occurs.

So what can you do?

I believe there are two basic systems of asset protection. There is one system for the uninformed which says “just carry insurance,” and there is a completely different system for informed people who have been taught about wealth preservation and asset protection by virtue of coming from multi-generational wealth.

The good news is that you don’t have to be ultra-wealthy in order to take advantage of the “informed system” of asset protection.

Does Insurance Offer Asset Protection?

Yes, insurance does offer a limited form of asset protection, but it has flaws and can actually work against you. Think of the following:

  • Insurance can, in fact, encourage suits against you, because plaintiffs’ attorneys see an easy pot of money from which to collect. Asset protection, on the other hand, discourages lawsuits and creates incentives for plaintiffs to settle for pennies on the dollar, since even a victory in court doesn’t guarantee they’ll collect winnings.
  • Insurance only covers you for specified occurrences. It doesn’t cover you outside of carefully defined circumstances, so the moment you’re sued, the insurance company may stop “batting for you” and start look for reasons to deny coverage.
  • Insurance requires annual premiums, whereas asset protection is a one time investment that can last several lifetimes.

That said, I do always encourage my clients to carry a reasonable amount of insurance for the liabilities they are most likely to face. The reason is simple: Insurance companies will pay for your legal defense (though with good asset protection planning you may choose not to defend at all)! The cost of defending against a lawsuit can be absolutely mind boggling. Besides that, the existence of a policy with a reasonable (rather than the highest) coverage limit may encourage a plaintiff’s attorney to settle for the “sure thing” rather than risk going to court.

Proactive Asset Protection

Your assets are protected when you’ve taken advantage of all the legal tools available to you before a creditor claim arises or a lawsuit is filed. In many cases, if a lawsuit has been filed (or even threatened), it’s too late for asset protection.

Some asset protection is automatic. In Florida or Texas, for example, a homestead is practically always off limits. Assets that are automatically protected are called exempt assets, and we’ll talk more about them in future articles.

Another form of asset protection is debt. Yes, you read that correctly. A home valued at $1,000,000 with an outstanding mortgage of $800,000 only has $200,000 of  equity in need of protection. In other words, to adequately protect yourself, you need to understand what is and what is not an “asset.” Assets with equity are often times in need of protection (unless they are exempt assets), but many times assets are so encumbered by debt that they provide their own unique form of asset protection, even though you have full use and control of the underlying assets.

That brings up an important point. Use and control of assets, without technical legal ownership of the assets, is the key to protecting wealth.

Asset Protection Trusts

The goal of any asset protection plan should be to reduce your lawsuit profile and eliminate the possibility of creditor claims, whether from litigation, guarantees on business loans, or most other types of liabilities. Plaintiffs’ lawyers are highly attracted to wealth, so the best way to reduce your profile and ward off lawsuits is simple: Don’t own anything!

If you don’t own anything, what can your creditors take away from you? NOTHING.

This might sound absurd, but think about what you really want out of your assets:

  • Control – The ability to do what you want with those assets when you want to do it.
  • Use – What’s the point of having assets if you can’t use them?
  • Legacy – The right to designate where those assets go when you die.
  • Leverage or Liquidation – Use of the assets to purchase other assets, secure loans, or the ability to sell them outright.

If you could have all of the above but not legal title, would you lose much sleep? Probably not. My clients actually report sleeping much better at night after creating an asset protection plan!

The good news is that you can control and use your assets while shielding them from creditor claims!  The legal tool that we use to achieve this is called an asset protection trust.

If you would like to learn more about setting up an asset protection strategy, please call me today at (877) 727-1092 or email me directly at Wayne [“at”]

Protection from Lawsuits Part I

Protection from LawsuitsIn this three part series, I’m going to analyze ways in which you can insulate your assets from the legal system.  Part I (this article) will discuss why it’s important to be “judgment proof.” Part II will delve into different types of assets that need protecting. Part III will bring everything together in terms of establishing a plan.

Protection from Lawsuits

What is the best way to discourage a plaintifs’ attorney who works on contingency fees? The most effective method is to make sure you’re overlooked by them. Not having any assets is one way to make sure that happens. In the legal community, people without any assets are called “judgment proof.” Being judgment proof is an excellent way to protect assets from lawsuits. Attorneys want to make the easy money. They don’t want to waste time pursuing defendants that will be unable to pay.

Remove the Contingency Fee, Remove the Incentive to Sue

Again, most plaintiffs’ attorneys work on contingency fees. You’ve seen those guys on T.V.: “We don’t get paid unless you collect!”

Personal injury and malpractice attorneys do not receive upfront retainers from clients. They don’t bill by the hour either. The only way these lawyers get paid is by winning or settling cases and collecting. If a plaintiff’s attorney loses a case, they get no compensation and are often “out” the expenses of litigation (e.g. court costs). The same thing happens if they win but can’t collect.

It’s obvious that personal injury and malpractice claims attorneys must evaluate several factors when deciding whether or not to take on a new case. First, they must determine the likelihood of establishing liability (i.e. winning the case). Second, they have to determine if the defendant will be able to pay.

The defendant’s ability to pay is a critical factor. If a potential defendant is judgment proof, then they are not considered an easy target.  As the saying goes, “If you’ve got nothing, you’ve got nothing to lose.”  Pursuing a course of litigation against a judgment proof defendant would be a waste time and money for most personal injury and malpractice attorneys. Even if liability can be established, there is no way to collect. If there is no way to collect, there is no way to get paid. It’s that simple.

It’s All About the Money

Plaintiff’s attorneys are in the game to make money. It would be an absolute anomaly to see a lawsuit filed against a business or individual that does not have assets and the ability to pay.

The takeaway is that being judgment proof provides an excellent form of lawsuit protection for your assets. It’s an easy way to deter litigation. How this applies to a person with significant assets will be discussed in the third part of this series.

If you’d like to learn more about asset protection planning, please call us today.