Spendthrift Trust - Trusts Where The Beneficiary Is Also The Creator - The Exception: DAPT States

The Exception: DAPT States

However, several states have changed their laws to provide that a person may create a self-settled spendthrift trust (i.e., a spendthrift trust for his or her own benefit). Such trusts are also called Domestic Asset Protection Trusts ("DAPT"), and sometimes informally called "Alaska trusts", as Alaska was a pioneer in allowing this kind of spendthrift trust. However, because of the danger of the misuse of Alaska trusts to defraud creditors, the legality of such trusts (to the extent that they purport to protect the trust share of a beneficiary who is also a creator of the trust) is uncertain in the states not allowing self-settled spendthrift trusts.

Nevada has enacted a series of statutes, codified at Chapter 166 of the Nevada Revised Statutes, that specifically enable the creation of self-settled spendthrift trusts. This form of trust is commonly referred to as a "Nevada Asset Protection Trust". Under Chapter 166, an individual can serve as the settlor, trustee and beneficiary of the trust. This network of laws is specifically designed to protect trust assets from the claims of any creditor. NRS 166.170 specifically limits the circumstances under which a creditor may bring a claim. If a creditor existed at the time of the property's transfer to the trust, then the creditor must bring its claim against the trust within 2 years after the transfer or within six months after the creditor reasonably should have known of the transfer, whichever is later. NRS 166.170(1). If the creditor's claim surfaces after the transfer is made, the creditor must bring its claim within two years after the transfer, regardless of notice. NRS 166.170(1). Moreover, the creditor can only sustain its claim if it can prove by clear and convincing evidence (a tough evidentiary standard) that the transfer was made as a fraudulent conveyance. NRS 166.170(3).

It is unclear the extent to which sister states will recognize the asset protections of these DAPTs, like those created under the laws of Nevada and Alaska. Relevant case law is somewhat sparse. While states are generally compelled to honor and recognize the laws of sister states, pursuant to the full faith and credit clause of the United States Constitution, some of these laws may be in direct conflict with the laws of other states. Some of these DAPT laws can be quite expansive. The scope of the Nevada law is drawn quite broadly to govern Nevada's enforcement of all trusts created within or outside the state, so long as they meet certain limited criteria. See NRS 166.015(1). The law goes on to require that the statutes be applied to the enforcement by any other state of any spendthrift trust created within Nevada, so long as the law is not in direct conflict with the other adjudicating state. NRS 166.015(3). In fact, the Nevada law does not even require that the trust assets be located within Nevada, so long as one of the trustees declares his/her domicile as Nevada. NRS 166.015(1)(d).

The following other states now have a DAPT statute: Delaware, South Dakota, Wyoming, Tennessee, Utah, Oklahoma, Colorado, Missouri, Rhode Island and New Hampshire.