< "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
Copyright © 1995-2013 Robert L. Sommers, All rights reserved.
< "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
Copyright © 1995-2013 Robert L. Sommers, All rights reserved.


Using Domestic Asset Protection Trusts to Avoid Bankruptcy

Introduction   On March 2, 2005, the New York Times published an article contending that domestic asset protection trusts (DAPT), available in Alaska, Delaware, Nevada, Rhode Island and Utah, can be used to exempt assets from bankruptcy. Under these DAPT statutes, property held in these trusts do not belong to the individual, and state law governs whether an asset belongs to an individual and is therefore under the jurisdiction of the bankruptcy court.

Spendthrift Trusts   Bankruptcy law acknowleges that "spendthrift trusts" (a trust formed to protect the beneficaries from creditor claims) are not subject to the claims of creditors in bankruptcy. Generally, if a spendthrift trust is set up for education or retirement planning, it is exempted from the estate of a bankrupt individual. However, a debtor in bankruptcy cannot create a spendthrift trust to protect himself from creditors -- a so-called "self-settled spendthrift trust."

Domestic Asset Protection Trusts   In contrast, DAPTs allow for self-settled spendthrift trusts, thus, a wealthy person can transfer property to an asset protection trust and usually 2-4 years later (depending on state law)he can file for bankruptcy without subjecting the trust's assets to creditor's claims.

Note: Each state has provisions allowing creditors a time period to claim against the DAPT and requiring that the individual remain personally solvent after the transfer.

DAPTs are used to defeat potential creditors and are favored by those in high-risk professions, such as doctors, dentists, corporate executives, owners of companies and those dealing with federal and state security regulations that expose them to personal liability.

Note: DAPT statutes are relatively new and have not been exposed to rigorous court challenges. For instance, whether a California court will rule that a Nevada Spendthrift Trust shields assets from creditors of a California resident, a result that contradicts California's prohibition against self-settled spendthrift trusts, remains an open question.

Conclusion   Unless Congress amends the pending bankruptcy legislation, DAPTs will provide individuals with substantial assets with a way to shield those assets from creditors, even when the individual files for bankruptcy.

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All contents copyright ? 2008 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet(TM) is a trademark of Robert L. Sommers.