Asset-protection Trust - Domestic Asset Protection Trust

Domestic Asset Protection Trust

Alaska was the first US jurisdiction to enact laws allowing protection for self-settled trusts (in 1997) and was shortly followed by Delaware, Nevada, South Dakota and a few others. These trusts are known as Domestic Asset Protection Trusts (DAPTs). Usually, a DAPT must comply with the following requirements:

• the trust must be irrevocable and spendthrift;
• at least one resident trustee must be appointed;
• some administration of the trust must be conducted in respective state;
• the settlor cannot act as a trustee.

Trusts are generally governed by the laws of the jurisdiction that is designated by the settlor as the governing jurisdiction. There are two exceptions to the general rule, which may create conflicts of law: (i) states will not recognize laws of sister states that violate their own public policy, and (ii) if the trust owns real property, such property will be governed by the law of jurisdiction that is the property's situs. Additionally, the Full Faith and Credit clause of the Constitution provides that each state must give full faith and credit to the laws of every other state. This means that if a court from another state refuses to recognize the protection of a DAPT and enters a judgment for the creditor, the creditor may be able to enforce the judgment against the trustee of the DAPT, even if that trustee was located in the DAPT jurisdiction. The efficacy of a DAPT may also be challenged under the Supremacy clause of the U.S. Constitution, under the applicable fraudulent transfer statute, or because the settlor retained some prohibited control over the trust.

These jurisdictions are also known as United States Asset Protection Trusts (USAPTs), from the point of view of the non-US settlors. The issues that would seem to apply on a USAPT established by a non-US settlor are: 1) whether a non-US court has jurisdiction over the USAPT; 2) the conflict of US versus non-US laws (i.e., which jurisdiction's laws will apply to the trust and the protection it purports to offer); 3) which fraudulent transfer law would apply; and 4) whether the US state court will recognize the non-US judgment.

The context of a non-US settlor has a few advantages over that of a US settlor. The issue of the Full Faith and Credit clause doctrine of the US Constitution would not apply to a non-US settlor facing a non-US judgment. Creditors of non-US settlors would have to first obtain a judgment in their home jurisdiction and then attempt to enforce that "foreign" judgment in the US against the trustee of the USAPT, who was not a party to the original action. Therefore, except in unusual cases, this would mean that the only issues to litigate would be whether a fraudulent transfer has taken place, and in turn, which jurisdiction’s fraudulent transfer laws would apply. Despite that, the non-US creditor must still seek to first have the foreign judgment recognized, because without formal legal acknowledgment of the judgment in the US court, there would be no basis on which to question the transfer.