Domestic Asset Protection Trusts Continue to Falter

Last year, we warned practitioners about the passage of Ohio’s domestic asset protection trust law, which purports to protect assets held in the name of a trustee based in Ohio.  Mississippi has recently joined the bandwagon, selling DAPTs as if the courts of the State of Mississippi will go to the ends of the earth to defend a New York resident who titles his Arizona real estate and Texas-sitused investment account in a Mississippi DAPT.  Unfortunately, Mississippi’s DAPT law is as much snake oil as the Alaska and Nevada DAPT laws that have been struck down when challenged by creditors.

One Las Vegas-based attorney who holds himself out as a specialist in asset protection planning (and who helped author Nevada’s DAPT law) has challenged anyone to find a single court case where a DAPT trust has been overturned outside of bankruptcy court; he contends that DAPTs in standard civil court proceedings are more likely to withstand creditor attack.  Well, we did find a case where a non-bankrupty court overturned a DAPT, and we wrote about it here last year:  In Kiker v. Stillman, 2012 WL 5902348 (Cal.App. 4 Dist., Unpublished, Nov. 26, 2012), a non-bankruptcy court found that a California debtor’s selection of Nevada law for a DAPT was inherently fraudulent as against creditors, thereby rendering all contributions to a Nevada DAPT invalid as fraudulent transfers.  If you live in California, you should forget about even thinking of engaging in DAPT planning because it simply will not work.

We have also seen a similar outcome for domestic asset protection planning using LLCs by residents of California and Florida.  A bankruptcy court in In re Cutuli, 2013 WL 5236711 (S.D.Fla., Sept. 16, 2013) took the scalpel to a debtor’s funding of a Wyoming LLC marketed as an asset protection vehicle.  True, it was a bankruptcy proceeding, and the facts of that case were egregious.  The loss in Cutuli was so catastrophic that, as the bankruptcy court noted, the creditor seized all of the debtor’s assets in the state court proceeding.  Cutuli is not so much a case about the efficacy of the Wyoming LLC as an asset protection device as it is a testament to the fact that asset protection planning does not work for those seeking to avoid their existing creditors.

When we hear someone challenge the legal community to produce a ruling that shows a civil court overturning a DAPT, our response is:  Show us a ruling where a civil court has sustained a DAPT against a creditor attack.  You won’t find it.