N.Y. Times Article on Domestic Asset Protection Trusts

The N.Y Times ran an article on the proposed bankruptcy reform legislation now being debated in the U.S. Senate, and it said the law failed to close loopholes created by domestic asset protection trusts which are provided for by statutes of several states including Alaska, Delaware, and Utah. The Times quoted experts who stated that the new law would not stop people who had established domestic, as well as offshore, asset protection trusts from protecting their assets in bankruptcy.

These commentators are correct in theory, but their comments may not apply to most real life asset protection planning. First, most asset protection trusts are not set up correctly. Because most debtors fear relinquishing control over their assets to a third party trustee, debtors usually insist that either they or a closely related family member serves as trustee or that they at least retain the right to remove and replace their trustee. When a debtor files bankruptcy all of his interests and rights are turned over to the bankruptcy trustee including, if applicable, his control over the trust or his control over the trustee of the trust. Bankruptcy courts can force the debtor to exercise his retained control to appoint the bankruptcy trustee as trustee of the asset protection trust.

Another issue with domestic asset protection trust is whether Florida courts will recognize the statutory rights given debtors in the protective states to protect a trust the debtor himself sets up for his own benefit. Florida law considers these so-called self settled trust contrary to public policy. Lastly, many debtors establish these trust and then delay in transferring assets to the trust until they are sued. Any transfer to a domestic or foreign asset protection trust within one year of bankruptcy may be grounds for denial of discharge as a fraudulent conveyance, or if done more than one year but less than four years prior to bankruptcy, may be subject to reversal and recapture by the bankruptcy trustee.

Using domestic asset protection trusts to protect assets in bankruptcy requires detailed planning, expert legal advice, and planning many years prior to bankruptcy filing.