Hybrid DAPTs, Regular DAPTs and the Uniform Voidable Transactions Act

By Steven J. Oshins Esq., AEP (Distinguished)

A small minority of states have adopted the new Uniform Voidable Transactions Act (“UVTA”). This Act is actually not a new Act. It is supposedly merely a renamed version of the Uniform Fraudulent Transfer Act, but with certain changes.

These changes include substantial Comments (i.e., comments made as a part of the UVTA by the Drafting Committee) that have generated controversy in large part because of their conclusive nature on certain open issues. This article will focus on those Comments that are specifically directed at Domestic Asset Protection Trusts (“DAPTs”).

The Comments in Question

Perhaps the preeminent article on the UVTA is Karibjanian, Wehle, Lancaster, Sneeringer, “New Uniform Transactions Act: Good for the Creditors’ Bar, But Bad for the Estate Planning Bar?” LISI Asset Protection Newsletter #316 (March 14, 2016 – Part 1) and #317 (March 15, 2016 – Part 2). This lengthy two-part article is a must-read for any estate planner. The article lays out the issues in much more detail than that which will be very briefly summarized herein.

According to just a small part of a very compelling, lengthy argument made in the Karabjanian article:

“The real teeth are found in the last three sentences of the seventh paragraph of Comment 8 to §4 (“Paragraph 7”), which are as follows:

By contrast, if Debtor’s principal residence is in jurisdiction Y, which also has enacted this Act but has no legislation validating such trusts, and if Debtor establishes such a trust under the law of X and transfers assets to it, then the result would be different. Under § 10 of this Act, the voidable transfer law of Y would apply to the transfer. If Y follows the historical interpretation referred to in Comment 2, the transfer would be voidable under § 4(a)(1) as in force in Y.”

The Comments: Should We Care?

In another recent article, “Jay Adkisson & the Reporter’s Comments to the Uniform Voidable Transactions Act,” LISI Asset Protection Newsletter #319 (April 11, 2016), well-respected asset protection attorney Jay Adkisson, a member of the UVTA Drafting Committee, very clearly notes that the Comments are not binding legislative intent. According to his article:

“Comments on the existing language of the statute cannot rise even to the level of legislative history. They carry little [m]or[e] weight than a law journal article by the Reporter and Drafting Committee that compile cases that have applied that language, and to some extent elucidate upon the Drafting Committee’s conception of how some issues should be analyzed within the statutory scheme.

The Comments, in short, are no more than a law journal article on steroids. The Comments are meant to be helpful, but — unlike, say, Treasury Regulations, which have the force of law — Comments are not law, and courts are no more bound by them than they are by any other law journal article.”

Do DAPTs Work for a Resident of a Non-DAPT State?

The ongoing discussion that has occurred for the roughly 19 years since the first DAPT statute was enacted has centered on the question about whether DAPTs work if set up by a resident of a non-DAPT state. Most people think that they work. However, there is still not even a single judicial decision in a non-bankruptcy, non-fraudulent conveyance situation.

The reason we see no case law is likely because no creditor wants to challenge a DAPT in what appears to be an expensive, uphill battle. The good news for asset protection planners and their clients is that asset protection is generally focused on structuring one’s assets so as to obtain a quick and cheap settlement. Under this definition, DAPTs have worked very well. No case law is necessary to arrive at that conclusion.

I personally expect that a non-DAPT court will rule that its own state law applies and rule in favor of the plaintiff. Whether that is right or wrong, that appears to be the expected result, at least in the local court. However, I also personally expect that the DAPT court will then refuse to honor that judgment and will claim that its own state law applies. So what happens in this conflict of law analysis?

Subsection (b) of §273 Restatement (Second) of Conflict of Laws (1971) provides as follows:

“§ 273 Restraints on Alienation of Beneficiaries’ Interests.

Whether the interest of a beneficiary of a trust of movables is assignable by him and can be reached by his creditors is determined …

(b) in the case of an inter vivos trust, by the local law of the state, if any, in which the settlor has manifested an intention that the trust is to be administered, and otherwise by the local law of the state to which the administration of the trust is most substantially related.”

Thus, the conflict of laws analysis indicates that the DAPT assets should clearly be protected, even for a settlor who resides in a non-DAPT state. The law appears to be clear, but many practitioners still claim otherwise, hence the reason to “play it safe” and increase the probability of success by adjusting the planning.

Bring on the Hybrid DAPT!

In the interests of avoiding the perception of risk inherent in using a regular DAPT, the practitioner should highly consider using a Hybrid DAPT which is a third-party trust that allows a trust protector to be appointed and gives the trust protector the power to add additional beneficiaries, including the ability to add the settlor as a beneficiary.

Thus, for separate property (i.e., not community property), the settlor sets the trust up for the benefit of the settlor’s spouse and descendants, and a trust protector can add (or remove) the settlor. For community property, the settlors jointly set the trust up for the benefit of the descendants, and a trust protector can add (or remove) either or both of the settlors.

The separate property version allows for the settlor to transfer a little more of his or her wealth to the trust given that distributions can easily be made to the spouse who can share them with the settlor, whereas the settlors need to be more careful with the joint community property version since one or both of them would have to be added as a beneficiary in order to access the trust (other than through distributions to their children, parents, siblings, etc. who can share the distributions with them).

It is always important to leave sufficient wealth outside of the trust regardless. Usually that wealth is instead protected using a charging order protected entity such as a limited liability company or limited partnership. Since a charging order is simply a lien, this strategy generally works well to give a creditor an uphill battle in accessing the underlying assets. The charging order protected entity should be used as the secondary technique, not the primary technique, though since the assets are “stuck” in the entity and inaccessible to the defendant and defendant’s family.

The bottom line is that the Hybrid DAPT should substantially move the settlement number more in the debtor’s favor and induce a quicker and cheaper settlement. Not to go unnoticed, the advisor who recommends the Hybrid DAPT looks better to the client and to the client’s other advisors than one who suggests a regular DAPT because he or she appears to have put more thought into the structure and to have a greater level of sophistication.

RELATED EDUCATION

To find out more about DAPTs, join us and nationally renowned attorney Steve Oshins on Tuesday, May 31, 2016 at 9am Pacific Time (12pm Eastern Time) for his creative estate tax and asset protection planning strategies on this new Hybrid Domestic Asset Protection Trust technique, in a 60-minute plain-English teleconference entitled, “The Hybrid DAPT (Domestic Asset Protection Trust)”, so that you may start using it right away for your clients and prospects.

ABOUT THE AUTHOR

Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.

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