More and more clients are seeking asset protection as jury awards and the number of frivolous lawsuits continues to increase, in order to preserve their hard-earned assets to pass on to future generations. Such asset protection is available in various forms, including limited liability companies, corporations, homesteads, qualified retirement plans, offshore trusts, and domestic asset protection trusts. As of the date of this article, 18 states have adopted some form of Domestic Asset Protection Trust (“DAPT”) statute¹. Such statutes are not solely for the benefit of the residents of those 18 DAPT states. California has not yet passed a DAPT statute, however, many residents of California can still enjoy many of the protections DAPT states afford as long as certain conditions are met. This article discusses and explores the requirements of implementing a successful asset protection plan in such a situation, in which a California resident (a non-DAPT jurisdiction) sets up a Nevada DAPT. This article will show that a Nevada DAPT, structured as outlined below for a California resident, should provide a real benefit to the settlor by either (1) being upheld in its entirety if challenged, or (2), if a dispute arises, lead to an attractive settlement.²
First, the California resident must be a good candidate for a Nevada DAPT. To be a ‘good candidate’ the California resident should not have any impending litigation or creditor issues, and have other reasons for setting up the trust, which may include tax reasons – using up a lifetime exemption, taking advantage of Nevada’s income tax laws, gifting assets to reduce an estate for estate tax purposes; or other reasons such as pre-marital planning, protecting beneficiaries (other than him or herself) against potential ex-spouses, their creditors, etc. It is important for the drafting attorney to perform due diligence on the client to ensure that they are a qualified applicant and are not engaging in this type of planning to hinder, delay, or defraud known creditors.
In our example, we will assume that the California resident’s DAPT is in compliance with the Nevada DAPT statute and possesses the circumstantial factors described in the complete article.
¹ See Steven J. Oshins, “8th Annual Domestic Asset Protection Trust State Rankings Chart” (April 2017) (States with some form of DAPT Statute: Alaska, Colorado, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming).
² Thomas E. Greene III, “Structuring Self-Settled Trusts for Non-Resident Settlors,” Trusts & Estates, 29-35 (November 2016).