Domestic Asset Protection Trusts: Improving financial longevity
I will admit that I am not the biggest proponent of asset protection devices. Primarily because there seems to be a lot of schemes and scams sold under the guise of "asset protection." But not every asset protection device is bad. In fact, there are some very good, and legitimate (and, yes, legal), asset protection strategies. Our friend and colleague, Michael Hackard, at Hackard Law in Sacramento, was kind enough to submit this guest post on the subject of domestic asset protection trusts, one of the legitimate forms of asset protection. Hope you enjoy this informative post:
THE SUBTITLE: I struggled a bit for an appropriate subtitle regarding Domestic Asset Protection Trusts (DAPTs). I wanted the subtitle to be descriptive, to underscore the benefits of DAPTs and to neither overstate nor understate the trusts’ advantages. While such trusts have limitations, they can substantially improve “financial longevity” for individuals and families.
DEFINITION: Alaska has been the leader in updating its trust laws and has some of the most expansive asset protection laws in the United States. Alaska was the first state in the country to allow “self-settled” trusts. The advantages and a description of “self-settled” are delineated in the website of one of Alaska’s leading trust companies.
Alaska has the best trust spendthrift statutes for both the grantor and other trust beneficiaries. Alaska provides for "self-settled" spendthrift trusts which allows the grantor to set up an irrevocable trust, be a discretionary beneficiary and avoid having the assets be subject to creditor claims of either the grantor or any other beneficiary. Also, the assets in such a trust may be excluded from the grantor's taxable estate even though the grantor is a trust beneficiary. . . Alaska has no special "class" of creditors which, unlike the laws of other states, would permit those creditors to attach the assets of the trust. Alaska allows creditors to attach trust assets in a self-settled trust only upon proving by actual fraud (and not "constructive" fraud).
ADVANTAGES: As the above definition reflects, “self-settled” spendthrift trusts allow the grantor to establish an irrevocable trust while still being a discretionary beneficiary of the trust. A grantor is the creator of a trust and is the person who initially places his or her assets into a trust. Thirteen states now have some statutory frameworks that allow for self-settled trusts. Not all statutes are the same, and the level of protection available to grantors varies widely. That said, the remaining states that do not allow “self-settled” trusts follow the common law rule that generally prohibits the establishment of a trust with your own assets to benefit yourself.
ASSET PROTECTION AND THE DANGERS OF LITIGATION: The New York Times recently addressed one of the realities facing American families: The United States is the most litigious society on earth. I purposefully did not describe asset protection as “insuring financial longevity” because asset protection does not provide absolute insurance from the potential of runaway litigation. It does improve the probabilities of financial longevity and should address an orderly wealth transfer with effective tax planning. Self-settled spendthrift trusts are only part of asset protection. A number of other multiple entity structures are also important to effective planning.
SUCCESSES AND FAILURES: All states recognize the attorney-client privilege. The attorney-client privilege provides that what is said and written between a client and his or her lawyer is confidential and protected from disclosure to others. The “ethical duty of client-lawyer confidentiality is quite extensive in terms of what information is protected. It applies not only to matters communicated in confidence by the client but also to all information relating to the representation regardless of whether it came from the client herself, or from another source.”
The attorney-client privilege precludes much storytelling in the domestic asset protection field. Suffice it to say that some circumstances will preclude the utility of DAPTs while other circumstances will present “golden opportunities” for domestic asset protection that substantially improves family and personal “financial longevity.”Asset protection successes are successes that rightly belong in the zone of confidentiality and constitutional rights of privacy. Asset protection failures are often the focus of news stories or the cautionary tales of creditors’ lawyers.
CAVEATS: Wealth preservation planning is an ongoing process. Attorneys competent in the field must be aware of the ethical and legal issues that are part and parcel of asset protection. On the one hand an attorney might be vulnerable for failing to counsel a client about asset protection; on the other hand the same attorney must be cautious in counseling clients who wish to protect their assets from creditors. The asset preservation available in Domestic Asset Protection Trusts is evolving. Not many years ago self-settled spendthrift trusts were not allowed in the United States. Now the trend, although not cascading, is for their allowance. The impact of this trend and the statutes that accompany it will be part of “the life of the law” and its evolution through “experience.”
The life of the law has not been logic; it has been experience . . . The law embodies the story of a nation’s development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics. (Holmes, Selections from the Common Law, The Mind and Faith of Justice Holmes (Random House 1943), 51.)
It is likely that the role of Domestic Asset Protection Trusts will be tested, expanded, at times contracted, explored, updated and judicially articulated as time goes on. That said, their utility for estate planning should at the very least be considered and weighed for their applicability. Our observation in “Successes and Failures” is an appropriate close to this article: Some circumstances will preclude the utility of DAPTs while other circumstances will present “golden opportunities” for domestic asset protection that substantially improve family and personal “financial longevity.”
© Copyright Michael A. Hackard, 2012. All rights reserved.
 Rubin, More Money Into Bad Suits, The New York Times, Nov. 16, 2010, available at http://www.nytimes.com/roomfordebate/2010/11/15/investing-in-someone-elses-lawsuit/more-money-into-bad-suits (last viewed August 10, 2012).
 Sue Michmerhuizen, Confidentiality, Privilege: A Basic Value in Two Different Applications, Center for Professional Responsibility (May 2007) available at http://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/confidentiality_or_attorney.authcheckdam.pdf (last viewed August 10, 2012).