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What is a Delaware Asset Protection Trust (DAPT)? A Delaware Asset Protection Trust (DAPT) is the short
name for an irrevocable, self-settled Trust, under which the Settlor is a beneficiary. While eight states have
enacted statutes to permit such trusts since 1997 (including such popular Meccas as Alaska, South Dakota
and Rhode Island), Delaware appears to have the most favorable laws from both a trust and banking
standpoint for the creation of these trusts. So for purposes of this brief outline, we will discuss DAPT’s and
comment about how they operate and why they might be appealing to clients.
To provide asset protection, the settlor cannot be the sole beneficiary of the DAPT. At least one trustee must
be an individual or a bank resident in the State of Delaware, which usually means a Delaware bank. The trust
must be established under Delaware law and contain a "spendthrift" clause that basically provides that the
trust and the interest of any beneficiary are not subject to transfer, voluntary or involuntary, nor to the claim of a
creditor of any beneficiary.
In most states, such as Michigan, the assets of such an irrevocable trust in which the settlor remains as a
beneficiary, are subject to claims of the settlor’s creditors, pretty much regardless of the circumstances
involved. The laws of Delaware and the other states permit the protection of trust assets in these
circumstances. These laws were designed to attract trust business to the states enacting the laws. No doubt
local banks promoted these laws in the state legislature.
Delaware has long been a hospitable home for corporations. It also has well established trust companies
such as Wilmington Trust Company who have long experience in administering trusts and protecting the
interests of both settlor and other beneficiaries.
Why Use a Delaware Trust? There may be other reasons for establishing a trust in Delaware, such as
avoiding the limits on the number of years that a trust can be in existence (called the Rule Against
Perpetuities). However, the principal reason for most clients is to seek protection of substantial assets from
the possibility of creditors, claims. For example, a physician may set up a DAPT with $2.0 million of assets.
Subsequent to the creation of the trust, the physician is found liable in a medical malpractice suit. Can the
victorious plaintiff then seek to recover his or her judgment from the assets that have been transferred to the
DAPT?
There are a lot of legal points and legal arguments which are too numerous and detailed to discuss in this
newsletter. However, it is clear that Delaware establishes substantial barriers to creditors seeking to satisfy a
judgment from assets of a DAPT. In many cases a DAPT offers very practical insulation and protection for
these assets, especially for claims that arise before the trust is created. In those cases, the claimant has to
establish that the creation of the trust was a "fraudulent transfer". It appears that the only claims which are not
barred for which proof of a fraudulent transfer is not required, would be:
1) Certain family claims such as claims for child support or alimony. (A surviving spouse of the settlor cannot
reach the assets of the trust by spousal election whether or not the settlor lived in Delaware at death);
2) Tort claims. A person who suffers death or personal injury by actions of the settlor before the trust is
created may be able to reach the trust assets.
What Are Fraudulent Transfers? What is a fraudulent transfers is a complicated issue. For our purposes, we
can only note that the Uniform Fraudulent Transfer Act (UPTA) typically defines such a transfer as one made
with "intent to hinder, delay or defraud creditors". These become complicated legal issues and are definitely
fact specific. One important test is that a transfer is generally considered "fraudulent" if the transferor either
was insolvent at the time of the transfer or was made insolvent by virtue of the transfer.
Assuming that the transferor has other assets besides those transferred to a DAPT and is not rendered
insolvent by the transfer, any attorney advising a client or potential client about establishing a DAPT is wise to
analyze all of the facts and circumstances to make an independent evaluation as to the likelihood of the
transfer being deemed a "fraudulent transfer" in the particular facts and circumstances. This is because
usually clients consult attorneys about making asset transfers too late in the game. That is, somebody may
have been injured, a lawsuit filed, or a business gone bankrupt before the client comes in to discuss asset
protection and the establishment of a DAPT.
(We will not discuss Offshore Trusts, which have been the subject of well publicized litigation involving illegal
activities or transfers made to evade known creditors. The establishment of an Offshore Trust in many cases
is often considered evidence of fraud by virtue of the location of these Offshore Trusts.)
Delaware law offers some protection to attorneys and trustees who assist in setting up DAPT’s. Many
attorneys and trustees have been hesitant to get involved with asset protection trusts for fear of personal
liability, either to a creditor or a client. Delaware law offers some protection in this regard. Both attorneys and
Delaware trustees normally act cautiously in investigating all of the facts and circumstances and requiring
financial statements and affidavits of solvency. Because of the initial costs and expenses of specialized
counsel, we generally suggest that a client have a minimum of $2.0 million with which to fund a DAPT. Of
course, we also recommend that clients who are exposed to liability because of their profession or business
be mindful of the opportunities that DAPT’s can offer.
Should Financial Planners Avoid Any Mention of DAPT’s? Most financial planners and wealth managers may
be reluctant to even mention the possibility of a DAPT to client, for fear of losing all or part of the business to a
Delaware Trust Company. We are advised, however, that some Delaware banks have "unbundled" their fees
and will act as Trustee even though they are not managing the investments. Thus, a wealth manager or
financial planner could retain the business when a client establishes a DAPT with a Delaware bank as a
Trustee.
Because of the complexity of the subject matter and the fact that the laws of Delaware would be controlling
factors, we can refer any potential client who is interested in pursuing the matter at some length to competent
Delaware counsel. It would be a daring, and possibly imprudent, Michigan attorney who would venture into
these waters without specialized and properly licensed assistance.
Asset protection is a complicated subject, very fact specific as pointed out. The purpose of this newsletter is
merely to mention the availability of the DAPT’s as part of the arsenal in asset protection planning. We will be
happy to discuss DAPT’s and other assets protection options with any clients that you may have who are
interested in this topic. Please call Jim Modrall or any of the attorneys listed below at 231 941-9660.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr., John. M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H.
Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
name for an irrevocable, self-settled Trust, under which the Settlor is a beneficiary. While eight states have
enacted statutes to permit such trusts since 1997 (including such popular Meccas as Alaska, South Dakota
and Rhode Island), Delaware appears to have the most favorable laws from both a trust and banking
standpoint for the creation of these trusts. So for purposes of this brief outline, we will discuss DAPT’s and
comment about how they operate and why they might be appealing to clients.
To provide asset protection, the settlor cannot be the sole beneficiary of the DAPT. At least one trustee must
be an individual or a bank resident in the State of Delaware, which usually means a Delaware bank. The trust
must be established under Delaware law and contain a "spendthrift" clause that basically provides that the
trust and the interest of any beneficiary are not subject to transfer, voluntary or involuntary, nor to the claim of a
creditor of any beneficiary.
In most states, such as Michigan, the assets of such an irrevocable trust in which the settlor remains as a
beneficiary, are subject to claims of the settlor’s creditors, pretty much regardless of the circumstances
involved. The laws of Delaware and the other states permit the protection of trust assets in these
circumstances. These laws were designed to attract trust business to the states enacting the laws. No doubt
local banks promoted these laws in the state legislature.
Delaware has long been a hospitable home for corporations. It also has well established trust companies
such as Wilmington Trust Company who have long experience in administering trusts and protecting the
interests of both settlor and other beneficiaries.
Why Use a Delaware Trust? There may be other reasons for establishing a trust in Delaware, such as
avoiding the limits on the number of years that a trust can be in existence (called the Rule Against
Perpetuities). However, the principal reason for most clients is to seek protection of substantial assets from
the possibility of creditors, claims. For example, a physician may set up a DAPT with $2.0 million of assets.
Subsequent to the creation of the trust, the physician is found liable in a medical malpractice suit. Can the
victorious plaintiff then seek to recover his or her judgment from the assets that have been transferred to the
DAPT?
There are a lot of legal points and legal arguments which are too numerous and detailed to discuss in this
newsletter. However, it is clear that Delaware establishes substantial barriers to creditors seeking to satisfy a
judgment from assets of a DAPT. In many cases a DAPT offers very practical insulation and protection for
these assets, especially for claims that arise before the trust is created. In those cases, the claimant has to
establish that the creation of the trust was a "fraudulent transfer". It appears that the only claims which are not
barred for which proof of a fraudulent transfer is not required, would be:
1) Certain family claims such as claims for child support or alimony. (A surviving spouse of the settlor cannot
reach the assets of the trust by spousal election whether or not the settlor lived in Delaware at death);
2) Tort claims. A person who suffers death or personal injury by actions of the settlor before the trust is
created may be able to reach the trust assets.
What Are Fraudulent Transfers? What is a fraudulent transfers is a complicated issue. For our purposes, we
can only note that the Uniform Fraudulent Transfer Act (UPTA) typically defines such a transfer as one made
with "intent to hinder, delay or defraud creditors". These become complicated legal issues and are definitely
fact specific. One important test is that a transfer is generally considered "fraudulent" if the transferor either
was insolvent at the time of the transfer or was made insolvent by virtue of the transfer.
Assuming that the transferor has other assets besides those transferred to a DAPT and is not rendered
insolvent by the transfer, any attorney advising a client or potential client about establishing a DAPT is wise to
analyze all of the facts and circumstances to make an independent evaluation as to the likelihood of the
transfer being deemed a "fraudulent transfer" in the particular facts and circumstances. This is because
usually clients consult attorneys about making asset transfers too late in the game. That is, somebody may
have been injured, a lawsuit filed, or a business gone bankrupt before the client comes in to discuss asset
protection and the establishment of a DAPT.
(We will not discuss Offshore Trusts, which have been the subject of well publicized litigation involving illegal
activities or transfers made to evade known creditors. The establishment of an Offshore Trust in many cases
is often considered evidence of fraud by virtue of the location of these Offshore Trusts.)
Delaware law offers some protection to attorneys and trustees who assist in setting up DAPT’s. Many
attorneys and trustees have been hesitant to get involved with asset protection trusts for fear of personal
liability, either to a creditor or a client. Delaware law offers some protection in this regard. Both attorneys and
Delaware trustees normally act cautiously in investigating all of the facts and circumstances and requiring
financial statements and affidavits of solvency. Because of the initial costs and expenses of specialized
counsel, we generally suggest that a client have a minimum of $2.0 million with which to fund a DAPT. Of
course, we also recommend that clients who are exposed to liability because of their profession or business
be mindful of the opportunities that DAPT’s can offer.
Should Financial Planners Avoid Any Mention of DAPT’s? Most financial planners and wealth managers may
be reluctant to even mention the possibility of a DAPT to client, for fear of losing all or part of the business to a
Delaware Trust Company. We are advised, however, that some Delaware banks have "unbundled" their fees
and will act as Trustee even though they are not managing the investments. Thus, a wealth manager or
financial planner could retain the business when a client establishes a DAPT with a Delaware bank as a
Trustee.
Because of the complexity of the subject matter and the fact that the laws of Delaware would be controlling
factors, we can refer any potential client who is interested in pursuing the matter at some length to competent
Delaware counsel. It would be a daring, and possibly imprudent, Michigan attorney who would venture into
these waters without specialized and properly licensed assistance.
Asset protection is a complicated subject, very fact specific as pointed out. The purpose of this newsletter is
merely to mention the availability of the DAPT’s as part of the arsenal in asset protection planning. We will be
happy to discuss DAPT’s and other assets protection options with any clients that you may have who are
interested in this topic. Please call Jim Modrall or any of the attorneys listed below at 231 941-9660.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr., John. M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H.
Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| April 2006 DELAWARE TRUSTS - ASSET PROTECTION FOR YOUR CLIENTS? by James R. Modrall III, J.D., C.P.A. |