A domestic asset protection trust shields a client’s assets from creditors while allowing them to be discretionary beneficiaries, according to WealthManagement.com. However, there can be limitations when a client resides outside of a DAPT state, especially if the state adopts the Uniform Voidable Transfer Act, the publication writes.
The Difference in DAPTs and How the UVTA Could Affect Your Clients
Discretionary trust protection relates to whether a beneficiary has an enforceable right to distributions, according to WealthManagement.com. If they don’t, the beneficiary’s interest is expectancy and thus protected against creditor claims, the publication writes. The jurisdictions with the best asset protection based on discretionary support statutes are Alaska, Nevada, Oklahoma, South Dakota and Tennessee in the top tier and Delaware, Michigan, Mississippi, Ohio and Wyoming in the second tier, WealthManagement.com writes.
Alter ego arguments — dominion and control arguments — can be used to access a beneficiary’s interest in a trust, the publication writes. Because of this, Mississippi, Nevada, Oklahoma, South Dakota and Tennessee have created statutes to protect against suggestions that the trust is the trustee’s or beneficiary’s alter ego, according to WealthManagement.com. When ranked by anti-alter ego statutes, Mississippi, South Dakota and Tennessee are top tier and Nevada and Oklahoma are second tier, with no other states listed as they are yet to adopt relevant statutes, the publication writes.
Most DAPT statutes include a spendthrift clause, which generally stops a creditor from attaching a beneficiary’s interest and bans the sale of the interest, according to WealthManagement.com. DAPTs will often include exception creditors, such as child support, and apply them to both discretionary and support trusts, which highlights the need to adopt anti-alter ego statutes, according to the publication. Using DAPT statutes (qualified disposition statutes), Nevada, Ohio and South Dakota rank top tier, and Alaska, Delaware, Tennessee and Wyoming rank in the second tier, WealthManagement.com writes.
The unmodified adoption of the UVTA could undermine DAPTs as a means of asset protection, according to the publication. This is because the UVTA and its comments could make transfers from outside a DAPT sate voidable, giving rights to creditors who were “neither existing or anticipated” at the time of a transfer, according to WealthManagement.com.