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DAPTs Under Attack? How Courts
and Lawmakers Are Pushing Back Against
Domestic Asset Protection Trusts
In 1997, Alaska became the first state to
enact legislation authorizing the use of
domestic asset protection trusts (DAPTs).
In the years that followed, a steady flow
of states enacted similar legislation
and authorized the use of DAPTs, with
17 states authorizing their use today.
However, 2018 brought significant
pushback against this technique. To
understand that pushback, it is helpful to
first understand what exactly a DAPT is,
and what makes it controversial.
DAPTs are unlike any other asset
protection vehicle offered in the U.S.
Under general common law principles,
a settlor (trust creator) could not place
his or her own assets into a trust and
protect those assets from his or her own
creditors. Instead, a settlor could only
protect trust assets from creditors of
other beneficiaries. Most commonly, this
involves a parent establishing a trust for
the benefit of his or her child. The parent's
assets placed in the trust are, while in
trust, generally protected from the child's
creditors. But that does not satisfy the
desire of at-risk professionals like doctors,
real estate developers, athletes and others
to protect their own assets from their own
creditors. In response, at-risk individuals
seeking to protect their own assets looked
offshore and began establishing foreign
asset protection trusts in jurisdictions
like the Cook Islands, Cayman Islands
and others. This type of planning worked,
as these far away and small jurisdictions
had their trust law carefully constructed
to include extremely debtor-friendly
provisions to attract foreign investment.
Back in the U.S., many states watched
on the sidelines as millions of dollars
of U.S. wealth moved to these offshore
jurisdictions. In 1997, Alaska enacted the
first DAPT statute and forever changed
asset protection in the U.S.
Alaska's 1997 DAPT statute offered
at-risk professionals and others what they
previously could only receive offshore:
creditor protection of the settlor's assets
once the assets were transferred into
an Alaska DAPT. Of course, to benefit
from this protection, the transfer into the
DAPT in Alaska (and other subsequent
jurisdictions) could not be fraudulent.
Other states, seeing the potential to retain
their residents' wealth, enacted DAPT
statutes in the years after 1997. But 2018,
however, bucked the DAPT-friendly trend.
The first element of pushback in 2018
came from the Supreme Court of Alaska.
The case, Toni 1 v. Wacker, involved a
lawsuit between two families in Montana.
After a series of default judgments
in the Montana trial court, the family
subject to the judgments transferred
their Montana real estate into an Alaska
DAPT. Unsurprisingly, the transfer was
alleged to be fraudulent in Montana
court, but the family transferring the real
estate argued Alaska's DAPT statute
mandated all claims against an Alaska
DAPT must be brought in Alaska. The
case then found its way to the Alaska
Supreme Court which agreed with that
reading: the statute did require all
actions against an Alaska DAPT be
brought in Alaska. However, the Alaska
Supreme Court found that provision of
the statute unconstitutional, holding
that Alaska's legislature cannot limit the
scope of another state's jurisdiction. The
Montana Court was now free to unwind
the transfer to the Alaska DAPT.
But more significant than the result
for these parties, Toni 1 is a direct
rebuke of a strategy many offshore
jurisdictions use. The strategy is to force
a creditor to bring suit in the locality
where the trust is located. For example,
the Cook Islands require a creditor
to bring suit against a Cook Islands
trust in the Cook Islands (conveniently
located over 4,000 miles from Los
Angeles) under local law where trustees
are explicitly permitted to wholly
disregard U.S. Court orders. Alaska
sought to borrow this tactic by forcing
actions against Alaska DAPTs to take
place in Alaska courts. However, the
Alaska Supreme Court rejected that
North America United States
Kyle Mordew is an associate with Schneider
Smeltz Spieth Bell LLP in Cleveland, Ohio. He
is very active in the firm's asset protection and
estate planning practices, sharing about his
work on the Schneider Smeltz Spieth Bell asset
protection blog.
Schneider Smeltz Spieth Bell LLP
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Suite 900
Cleveland, Ohio 44114
216.696.4200 Phone
Kyle Mordew