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

In Waldron v. Huber (In re Huber), Waldron v. Huber (In re Huber), Case No. 11-41013 (Bankr. W.D. Wash. Nov. 25, 2013), the court (in dicta) ruled that the law of the residency of the settlor of a Domestic Asset Protection Trust (“DAPT”) applies rather than the law chosen in the trust agreement for purposes of determining whether a DAPT is protected from the creditors of the settlor.

[Dicta is a portion of the judge’s opinion that is not essential to the resolution of the case.  Huber was a bankruptcy and fraudulent transfer case, not a choice of law issue case.]

Why It Was 1,000,000% Wrong!

The judge said in dicta that the law of the residency of the settlor (Washington which has no DAPT statute) applies rather than the law chosen in the trust agreement (Alaska which has a DAPT statute).

The judge applied §270 of the Restatement (Second) Conflicts of Law in order to draw this conclusion.  However, the judge should have applied §273 of the Restatement (Second) Conflicts of Law.  Let’s see why…

§270 versus §273 of the Restatement (Second) Conflicts of Law

§270 is used to determine whether the trust is valid whereas §273 is used to determine whether the trust is protected from the beneficiary’s creditors. The best way to see why is to simply read both §270 and §273 which are set forth below.

• §270 Validity of Trust of Movables Created Inter Vivos – “[a]n inter vivos trust of interests in movables is valid if valid (a) under the local law of the state designated by the settlor to govern the validity of the trust, provided that this state has a substantial relation to the trust and that the application of its law does not violate a strong public policy of the state with which, as to the matter at issue, the trust has it most significant relationship under the principles stated in Section 6 [of the Restatement], or (b) If there is no such effective designation, under the local law of the state with which, as to the matter at issue, the trust has its most significant relationship under the principles stated in Section 6 [of the Restatement].”
• §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.”

The Problem for Asset Protection Planners

The problem is that the Huber case is cited frequently as gospel that DAPTs aren’t protected for settlors of states that do not have DAPT statutes.  As noted above, that result is 1,000,000% wrong.

However, in a settlement conference it moves the needle substantially in favor of the plaintiff.  And in a court case it is very possible that the judge buys into that result.

This is why the Hybrid DAPT (a third-party trust with the ability to add the settlor as a beneficiary at a later date, but note that the settlor is almost never actually added if the structure is well-planned) is generally far superior to a regular DAPT for residents of jurisdictions that don’t have a DAPT statute.

It’s certainly not bad at all to use a regular DAPT in such circumstances, and certainly isn’t malpractice or even close to malpractice since it’s the customary way to do the planning.  But advisors should at least consider the Hybrid DAPT as a way to enhance the potential results for their clients.

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
• Fear Factor: “Protecting Assets by Getting into the Creditor’s Head and Controlling His Mind”
• 2023 Trust Decanting Update
• Fixing Old “B” Trusts
• Trust Situs After Kaestner: Saving State Income Taxes Using Non-Grantor Trusts
• The NING Trust: Saving Significant State Income Taxes for Your Clients in High State Income Tax Jurisdictions
• DINGs and NINGs: Technical and Planning Issues
• Steve’s FREE State Rankings Charts

ABOUT THE AUTHOR

Steve Oshins, 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 was 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, 2022 and 2024. He can be reached at 702-341-6000, ext. 2 or soshins@oshins.com.  His law firm’s website is www.oshins.com