Thursday, April 3, 2014
Nina T. Dow (Suffolk University Law School) recently published an article entitled, The Hide and Seek of Creditors and Debtors: Examining and Effectiveness of Domestic Asset Protection Trusts for the Massachusetts Settlor, 27 Quinnipiac Prob. L.J. 170-185 (2014).Provided below is the overview to the article:
This paper explores the constitutional complexities of domestic asset protection trusts (DAPTs) and correspondingly attempts to highlight an approach for the creation and execution of a trust in another jurisdiction (foreign trust) whose assets will be protected from a creditor armed with a Massachusetts court judgment. Major challenges to asset protection vehicles remain constitutional in nature and case law directly providing a bright line set of rules is nonexistent to date. Before placing the main issue in context by way of an example, a brief overview of basic trust law is necessary, followed by an explanation of what a DAPT is and its intended purpose.
A trust is a form of ownership where legal and beneficial title to assets, whether tangible or intangible, are divided and usually held by different persons: a trustee who holds legal title and a beneficiary who only holds beneficial title.1 The trustee is in a fiduciary role owing a duty to manage the assets with the beneficiary's best interest in mind.2To create a trust, three parties are involved: the creator of the trust or "settlor," a trustee, and at least one beneficiary. 3 A settlor may also be a trustee and a beneficiary, depending on the trust's objectives which are too numerous for this discussion. 4 Major reasons for holding property in a trust include estate planning purposes such as probate avoidance, management of assets in the event of incapacity, privacy of title, 5 and protection of assets from creditors under some circumstances.
This paper will focus solely on the type of trust created for the purpose of managin assets including money. A settlor who creates a trust to manage money for a beneficiary who is Domestic Asset Protection Trusts 2013 likely to overspend can have advantages against that beneficiary's creditors.7 Such trust is called a "spendthrift" trust, which contains a provision restricting a beneficiary from transferring their interest in the trust voluntarily and involuntarily.8 These protection trusts also usually provide that all distributions to the beneficiary are totally discretionary with the trustee, so that the beneficiary has no rights under state law that might be attached by a creditor. These trusts are likely to be upheld in all jurisdictions, absent showings of fraudulent activity; however, once assets are distributed and are in the hands of the beneficiary, the trust's protection is lost. 9 Subject to exceptions in certain states, discussed infra, a settlor, if also a beneficiary, cannot shield his assets against creditors in the same way, even if the trust is irrevocable and not under the settlor's control.10 The creditors of such a trust may reach the assets to the maxi mum amount that the trustee may transfer to the settlor. Such a trust is known as "self-settled" and is regarded as violative of public policy in a majority of states, including Massachusetts.11 This is so even when a trustee is an independent third party who has full discretion over trust distributions.