Where should your trust be located?
Asset protection trusts for physicians can be domestic, offshore, or may utilize the best aspects of both structures. We examine the question of trust jurisdiction; where should your trust be located?
In part nine of our ongoing series on the trust law basics every doctor should understand we introduced some of the features common to most asset protection trusts, regardless of whether they are domestic asset protection trusts, commonly referred to as DAPTs or offshore or foreign asset protection trusts, or FAPTs.
There are currently about 19 states that have legislation that allow the formation of a DAPT in their jurisdiction. This number has grown over the last few years due to both consumer demand and the jurisdictions’ realization that the trust business can generate significant fees and draw wealth to their states. Among the most popular of the DAPT jurisdictions are Nevada, Montana, Delaware, and Wyoming but there are many others that have similar or even better statutes.
Which DAPT jurisdiction is best for you?
Experienced planners have strong opinions about which domestic jurisdictions are best and why and should be able to explain the benefits of the DAPT state they use and how they effectively protect you and your assets well beyond just, “Because we are in state X”. Among the best analysis of the various state DAPT statues is a simple comparison chart created by Las Vegas estate planning attorney Steve Oshins.
DAPTs are typically less expensive to set up and maintain than their offshore counterparts but are not as well tested and long proven on any wide scale and rely on the hope that, for instance, a judge in California with jurisdiction over a California defendant will refrain from trying to grab that defendant’s assets in Nevada because Nevada says they are in a special trust. DAPTs also unfortunately face “full faith and credit” challenges. Legally, a judgment in any state is good and enforceable against a defendant and their assets in every other state. As such, the main issue or flaw with DAPTs is that the trust’s assets remain in the jurisdiction and a the subjective judgment and control of the U.S. court system, regardless of the validity of the threat you may face.
Why professional guidance is vital
The laws in these states the level of protection they provide vary widely as do many of the other details, so professional guidance by experienced asset protection attorneys is highly recommended. This provides both guidance on the correct usage and operation of the tool itself and the protection of a “privileged” relationship with a licensed professional. Your communications with various non-attorney promoters and document preparers are not confidential, are discoverable in a lawsuit and they do not have professional liability for any malpractice. There are significant ramifications for making transfers to these kinds of vehicles including tax, estate, and fraudulent conveyance issues that you must understand or have counsel that does. Some DAPT promoters may apply form documents without a full understanding of their use and how it will affect your future defense, control, and use of those assets. Get personalized help from an experienced attorney who can help make sure that you are following the letter of the law to get any and every possible benefit the trust may provide.
Large numbers of DAPTS have been established over the last few years in various jurisdictions by planners of widely varying skill for clients with questionable timing. Unfortunately, “bad facts make bad law” and given the number of bad fact-planning cases that have been executed in the last few years, we may see many of these structures pierced. Although these cases should be judged individually on their merits, human nature makes it more likely that they will begin to be viewed as a group by the courts and either generally upheld or viewed as ineffective. Until that drama plays out, I advise against participating in the legal equivalent of a clinical trial.
In short, if you live in a DAPT state and fund a fully compliant DAPT with the right assets, and the legal challenge you face never leaves a state court, it may very well work. Outside that specific fact pattern, consider using multiple layers of proven legal tools, and for the highest level of protection for those who are financially qualified, offshore trusts and hybrid ‘Bridge Trust’ structures that will be the focus of our next installment.
Ike Devji, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years. He helps protect a national client base with more than $5 billion in personal assets, including several thousand physicians. He is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter.