Testing his theory that in every man dwells a good and an evil force, the reserved Dr. Jekyll develops a formula that separates the two, turning him into an argumentative estate planning attorney named Mr. Oshins who tells it like it is. Dr. Jekyll soon realizes he is becoming addicted to his darker self as he unleashes his opinions on the estate planning industry.
In this article, Dr. Jekyll and Mr. Oshins tackle the issue of whether a resident of a state that has no Domestic Asset Protection Trust (“DAPT”) statute should use a regular DAPT or a Hybrid DAPT. As expected, Mr. Oshins will provide a different view of the issue than that of Dr. Jekyll.
DR. JEKYLL’S VIEW: USE A REGULAR DAPT
A DAPT is an irrevocable trust set up under the laws of one of the 17 states that allows such a trust. The person setting up and funding the trust (the “settlor”) does not need to reside in one of those 17 jurisdictions. Under the statutes of each of those jurisdictions, after a certain waiting period, the assets transferred to the trust by the settlor should be protected from the settlor’s creditors.
After approximately 22 years since the first DAPT legislation passed, no non-bankruptcy creditor has challenged a DAPT all the way through the court system and been able to access any DAPT assets. Most likely this is because such a large majority believes that if tested the DAPT will work to protect its assets from a creditor of the settlor.
The good news is that a settlement is just as good as a victory in court. In fact, our clients want cheap and quick settlements. The lack of case law after so many years indicates that DAPTs have worked rather nicely since this indicates that they all just settle.
Mr. Oshins is both evil and too conservative. He has been telling anybody who will actually listen to him for the past two decades that we don’t know how a court will decide this. In my opinion, a 22-year track record is good enough for me! At what point will Mr. Oshins admit that he has been too conservative? Probably never, knowing how stubborn and evil and can be!
MR. OSHINS’ VIEW: USE A HYBRID DAPT
As usual, Dr. Jekyll is wrong!
The Hybrid DAPT is a strategy that substantially increases the probability that the trust assets will be protected. And it is very simple. The Hybrid DAPT is just like a regular DAPT except that the settlor isn’t an initial discretionary beneficiary of the trust, but can be added later. Thus, the trust is initially set up for the benefit of the settlor’s spouse and descendants, for example, but not for the settlor. By not including the settlor as a beneficiary of the trust, the Hybrid DAPT is by definition a third-party trust and therefore almost certainly avoids the potential risk of uncertainty and scrutiny of a regular DAPT.
Especially where the settlor is married and has a strong, trusting relationship with his or her spouse, is there any good reason that the settlor must have his or her name in the trust agreement as a beneficiary? It is very simple to indirectly access the trust assets through the spouse.
If the settlor has no spouse, then it becomes more difficult for the settlor to access the assets without being a beneficiary. However, the settlor can access the assets indirectly through exercising a power of appointment to the settlor’s children, siblings and/or parents. Irrespective of this, since a good asset protection planner will be sure to leave sufficient wealth outside of the client’s asset protection trust, in most cases the settlor won’t have to work through this issue anytime soon. Not to mention, for an unmarried settlor, the attorney will be sure to leave more assets outside of the trust than the amount that would be transferred to the trust for a married settlor.
In case the settlor needs to be a discretionary beneficiary of the Hybrid DAPT sometime in the future (i.e., if the settlor has no spouse, child, sibling and/or parent that will “share” a distribution with the settlor and the settlor now needs a distribution), the trust agreement provides that the trust protector can add additional beneficiaries, including the settlor. However, if the settlor is added, then the Hybrid DAPT becomes a regular DAPT and thus risks that the law is still unsettled on DAPTs (even though the substantial majority of people believe that they work).
I will admit that the 22-year track record is compelling, so I agree with Dr. Jekyll that there’s a strong likelihood that the regular DAPT will work just fine. But we still haven’t seen enough of these go in front of an actual judge, not to mention that different judges in different courts may rule differently from one another.
I will also note that we have no idea how many non-court disputes have ended with settlements that were significantly higher than the amount they would be had the creditor been facing a Hybrid DAPT instead of a regular DAPT. The additional fear factor alone can make a huge, huge difference in the dollars lost by the debtor because of the fear that the regular DAPT won’t be respected by the judge. It is much scarier to face a third-party trust (like a Hybrid DAPT) where there is almost no way for a creditor to access the assets than to face a regular DAPT where many people (even though they are most likely wrong) believe the trust won’t provide any protection if actually tested.
And with that, Mr. Oshins transformed back into Dr. Jekyll.
Dr. Jekyll and Mr. Oshins have very opposite views about DAPTs versus Hybrid DAPTs.
Mr. Oshins is argumentative, but he makes valid points. He is likely more correct than Dr. Jekyll is here because Mr. Oshins recognizes the value of the fear factor and how to outsmart the potential future creditor. Mr. Oshins is correct that there is no reason to take a risk that a particular judge is going to rule that the DAPT assets aren’t protected when it is so easy to outsmart the system by using a Hybrid DAPT.
The claims made by both Dr. Jekyll and Mr. Oshins are opinions only and each of them is entitled to his own opinion, even if the other doesn’t agree.
Steve has presented many information-packed teleconferences with The Ultimate Estate Planner which you can now purchase in our On-Demand library and get instant access to the handout materials and audio recordings. To view all of Steve’s past programs, click here.
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 email@example.com or at his firm’s website, www.oshins.com.