By Steven J. Oshins, Esq., AEP (Distinguished)
Nineteen domestic jurisdictions have statutes that allow a person to set up a Domestic Asset Protection Trust (“DAPT”).
A DAPT is an irrevocable trust set up by a person (the “settlor”) for the benefit of him/herself and other beneficiaries. 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.
Affidavit of Solvency
Asset protection planners will generally have their clients sign an Affidavit of Solvency which essentially says that the client isn’t making a fraudulent transfer to the trust.
This is good practice for an asset protection planner since it’s a good opportunity for the client to speak up if there is a preexisting creditor issue that the creditor hasn’t disclosed to the asset protection planner.
Requiring an Affidavit of Solvency
Nine of the 19 DAPT jurisdictions require a new Affidavit of Solvency for each and every transfer to the DAPT. This requirement was built into the statutes in those jurisdictions.
The jurisdictions that require an Affidavit of Solvency are (in alphabetic order): Alaska, Indiana, Michigan, Mississippi, Ohio, Tennessee, Utah, West Virginia and Wyoming.
Of these jurisdictions, three states—Michigan, Ohio and Tennessee—have certain provisions in their statutes allowing for exceptions to this being an iron-clad requirement.
Why Legislature Requiring Affidavits of Solvency Got It All WRONG!
When drafting a statute that is intended to attract business to the state, it is imperative that the draftsmen make it easy to comply with the rules.
People are human. People are busy. People are forgetful. Why would it make any sense to add this hurdle in order to enable a person to make use of that jurisdictions otherwise favorable statute?
It is logical to assume that some large percentage of people who have attempted to use these statutes to protect their assets have forgotten or simply neglected this hurdle. Unfortunately for them and their families, this isn’t just a minor problem. None of the assets they transferred to their DAPT without a qualifying Affidavit are protected from their creditors.
In addition, six of the nine states with this requirement do not have a substantial compliance rule. Therefore, if you miss one item and your DAPT is set up using the laws of those states, you have no protection unless you can somehow successfully beg a judge to make an exception.
Which Jurisdictions Don’t Require an Affidavit of Solvency?
The jurisdictions that don’t require a new Affidavit of Solvency for each and every transfer are (in alphabetic order): Connecticut, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island. South Dakota and Virginia.
These ten jurisdictions got it right. [A few of them made some other substantial errors in their statutes, but at least they got this part right!]
Summary
It’s good practice to make it as easy as possible for our clients to comply with a statutory opportunity such as a DAPT statute. Therefore, in this author’s opinion, asset protection planners should choose one of the jurisdictions that doesn’t include an Affidavit of Solvency hurdle.
RELATED EDUCATION
If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:
- The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
- Estate Planning Techniques in a Time of Low Interest Rates
- The Installment Sale to an Intentionally Defective Grantor Trust
- The Grantor Retained Annuity Trust: Significant Estate Tax Savings with Nearly Zero Gift Tax Risk
- Steve’s FREE State Rankings Charts
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He has been named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020 and 2022. He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.