Asset Protection Trust
An Asset Protection Trust, less commonly known as a
"self-settled spendthrift trust" is a trust you set up yourself to protect yourself from creditors. With the 2005
changes in the Bankruptcy Code on shore or domestic trusts may not provide such protection. These trusts known as
DAPT's - a Domestic Asset Protection Trust may by recognized as the Alaska Trust, the Delaware Trust, or the Nevada
The problem is that with the introduction of a 10 year limitation period
for transfers to self-settled trusts any transfers 10 years prior to a bankruptcy filing will be
You may with to contact your estate planning attorney to develop some alternate asset protection strategies.
Weaknesses of a Domestic Asset Protection Trust
A Domestic Asset Protection Trust is designed to be an alternative for foreign asset protection
trusts but not withstanding the new bankruptcy provision they have some inherent flaws.
Trustee is subject to US Jurisdiction
Should the trustee be obligated by a US. Court to divulge information he would have no choice but comply or face
charges of contempt or just as disastrous face civil lawsuits against his own property. Given the choice of
protecting himself or the trust - this is by far the most obvious weakness of a domestic trust. A foreign based
trustee could simply ignore any such action being totally outside of domestic jurisdiction.
Full Faith and Credit
Under the “full faith and credit” clause of the US Constitution any judgment made in any state can be transferred
and recognized by any other state. This means that if you formed your trust in one state its courts will be forced
to uphold any decision made in another state. This is not so in a foreign jurisdiction as any court proceedings
involving bringing witnesses from the US would have to started from the beginning - a very expensive and effective
Bringing "Import Law" or "Choice of Law" into another State will likely fail.
Legislation in Alaska, the Delaware, or Nevada is written to shelter an asset protection trust from creditors and
have a shorter statue of limitations and more conservative interpretations of what is considered a fraudulent
transfer. This runs contrary to the policy of the other forty plus states as most strictly prohibit such structures
in the interest of the public good. It is unlikely they will uphold legislation of another state if you are opposed
by a creditor in their state.
So you want to be careful as to where you get your advice and information in doing your estate planning and
asset protection trust planning. Consider jurisdiction not only in where you situate your trust but pay attention
in the selection of your trustees. Part of the key is to remove yourself from any association with the trust
itself. How you do that has every thing to do with jurisdiction and the structures that interface in each
jurisdiction be it in State, Off shore or in Common Law. For example you may operate a company in state that is
owned by an International Business Corporation (IBC) that is owned by an Asset Protection Trust /Foundation. You
get the tax and licensing benefits of being in State but your assets flow to a more favorable tax jurisdictions and
are ultimately untouchable inside a foreign asset protection trust foundation.