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Horizon Elder Law & Estate Planning Blog

Friday, August 18, 2017

What is a Domestic Asset Protection Trust?

Americans have used “offshore” or foreign asset protection trusts for decades as a vehicle to shield their wealth from creditors. Courts have invalidated offshore APTs by applying American law to these assets. That invalidation, combined with the expense of setting up offshore accounts and the risk that the entrusted foreign entity would abscond with the assets, made offshore APTs less appealing to Americans.

What is a Domestic Asset Protection Trust? Domestic asset protection trusts (DAPTs) are an attempt to make one’s assets immune to attack from creditors while keeping your assets in the United States. Some have called asset protection trusts the “death of liability.” Courts in some states have ruled that DAPTs are inherently fraudulent to creditors, in that their purpose is to keep assets out of the hands of creditors.

One interesting way people use DAPTs is to protect assets in a divorce. If you do not own the assets held in the DAPT, then your spouse cannot take half of them in a property distribution. The earnings of these assets also cannot be used in the calculations of child support or alimony (also called maintenance or spousal support). Or so the story goes. The reality can be a much different result.

In 1997, Alaska created the first domestic asset protection trusts law, allowing Americans to keep their assets in the United States, with a glimmer of hope of creditor protection. Delaware quickly enacted similar legislation. Now, over a dozen states have APT laws. California is not one of these states.

In fact, in California, it is illegal to move your assets out of state (to one of the states that allows DAPTs) for the purpose of protecting your assets from creditors. CA Penal Code § 154 applies to cases in which the person moving the assets has a judgment against him. CA Penal Code § 155 applies to cases in which the person moving the assets has a case pending against him. A California resident who tries to shield assets using a DAPT set up in another state can find themselves with these results:

  • A California court will invalidate the DAPT.
  • The assets will not be protected.
  • The money spent setting up the DAPT and the annual maintenance fees will be wasted.
  • The hapless debtor can be convicted of violating CA Penal Code § 154 or 155. If the amount of assets transferred was more than $250, the offense is a felony.
  • If convicted, the debtor can be sentenced to incarceration and a fine, and be a convicted felon.

A California lawyer who sets up a DAPT for a client can be guilty of violating the Rules of Professional Conduct, for advising or assisting a person in committing an illegal act. But if there is no judgment or case pending when a client wants to protect his assets, the asset transfer can still violate the California Civil Code, even though the violation is not a crime.

The California Fraudulent Transfer Act declares as fraudulent any transfer of assets made with the intent to “hinder, delay or defraud” any creditor, even if the obligation to the creditor does not exist at the time the asset transfer happens. The court can set aside the transfer of assets. It is important to note that there are some types of asset protection planning that are specifically allowed by California law, and these do not violate the California Fraudulent Transfer Law.

The bottom line is that you are permitted to set up a plan to protect your assets in California, but only in some situations. Estate planning is a convoluted maze of statutes and cases law that can even trip up lawyers who do not focus their practices on estate planning. You should talk with a California estate planning attorney to learn what asset protection planning techniques are available to you.

Request a consult with the professional elder law attorneys at Horizon Law today.

 


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