In Part 2, we discussed insurance protections for you. Now we will explore some less common methods for asset protection.
As many (or some) are already familiar, there are revocable living trusts for estate planning. There are also various types of Irrevocable Trust to meet other special circumstances, such as asset protection.
The Domestic Asset Protection Trust (DAPT) originally started in Alaska in 1997, followed by South Dakota (1983) and is an irrevocable trust established under one of the jurisdictions that allow the settlor of the trust to be a discretionary beneficiary and protect trust assets from the settlor’s creditors. Usually a DAPT must comply with the following requirements:
(1) the trust must be irrevocable and spendthrift;
(2) at least one resident trustee must be appointed;
(3) some administration of the trust must be conducted in respective state;
(4) the settlor cannot act as trustee.
One of the common rules is that there is a statute of limitations period determining how long the assets need to be in the trust before any new creditor issues arise, however existing creditors typically would be able to access the funds, due to a tolling of the statute of limitations. Many states do have exceptions as well, such as divorcing spouses and child support requirements.
As an example, the current (2015) state rankings of DAPTs can be found here, and it lists the top five as Nevada, South Dakota, Tennessee, Ohio, Delaware, and Missouri (yes, I know that is six…Delaware and Missouri were tied, besides, we are licensed in Missouri, so I couldn’t leave that out!).
These rankings change as laws change, for example, in 2013, Oshins named Ohio as the top place for DAPTs (prior to that, Ohio was unranked). This was primarily driven because they created the shortest statute of limitations for DAPTs at 18-months, with most of the other states having either two or four years, with the only two states that have a lower statute of limitations (Utah in 12th place and Virginia in 13th place) both having state income taxes, resulting in a far lower ranking. If I had to guess, if Utah removed the income tax for the DAPT, they would probably move to first place. As you can see, there are differences in income tax, statute of limitations, exception creditors, and preexisting torts exceptions.
One reason states are making asset protection a larger priority is because they want the assets to stay in (or come to) their states. They do not want to lose the assets. One example is that after about a decade, South Dakota had amassed about $75 billion in out-of-state trust assets. This is important for business, jobs, and tax revenue. As of April 2013, Delaware institutions brought in 90% of the fiduciary fees, generating $600 million to $1.1 billion in fees for Delaware.
One other type of trust that is becoming more popular after a the Supreme Court ruling on June 12, 2014, in Clark v. Rameker is a retirement trust. The Supreme Court determined that assets in an inherited IRA (Individual Retirement Account) is not protected from creditors. To provide the protection against creditors, the retirement trust has grown considerably since then. Even if you do not consider yourself affluent or wealthy, you should at least discuss a retirement trust with your attorney to determine if it is something you would be interested in.
As you can see, there are numerous methods to protect your assets. For most people, it is having proper insurance and possibly a retirement trust. For affluent and wealthy people, it may be a good idea to consider other avenues of protection beyond liability insurance.