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Trust Law/Level VI · Protection/6.1 Spendthrift to self-settled/Lesson 6

Choosing a DAPT state

The statutory features practitioners compare when looking at US domestic asset protection trust states, and why a rankings chart is a starting point, not an answer.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. First check what your own state already gives free: homestead, retirement and tenancy-by-the-entirety exemptions need no out-of-state trustee. Catch: In re Huber (2013) shows a non-resident’s DAPT may be judged under home-state law anyway.
  2. On statute alone, Nevada is leanest for settlors: a 2-year limit (NRS 166.170) and no listed exception creditors; Delaware allows 4 years and admits support and pre-funding tort claims (12 Del. C. §§3572-3573). Catch: bankruptcy’s §548(e) 10-year reach overrides any state period.
  3. Choose a trustee state with no personal income tax, such as Alaska, Nevada or South Dakota, so no extra state tax arises there. Catch: a self-settled DAPT is usually a grantor trust, so your home state may still tax its income to you.
  4. Keep only powers the statute expressly allows, such as Delaware’s distribution veto (12 Del. C. §3570). Catch: each retained power strengthens a creditor’s argument that you can bring the money back.
  5. Read the current statute free online rather than relying only on a paid ranking; Oshins’s chart (first published 2010) reflects one author’s weighting. Catch: cite the edition and year and check later amendments, since exception-creditor lists change.

MaterialsLesson 6.1.3, on domestic asset protection trusts, and lesson 6.1.5, on exception creditorsA practitioner survey comparing DAPT states, such as Steve Oshins’s Domestic Asset Protection Trust State Rankings Chart, noting its edition and yearThe asset protection trust statute of a state you are reading about, for example Delaware’s (12 Del. C. ch. 35, subch. VI), free on the state’s websiteLesson 6.1.7, on court cases, for what has happened when the settlor lived in another state

Wonder

  1. Why does a shorter limitation period favour the settlor rather than the creditor?
  2. How much control can a settlor keep without weakening the trust?
  3. Does a DAPT state’s law protect a settlor who lives in a state without such a law?

Explore

  1. Only a minority of US states allow domestic asset protection trusts (DAPTs), beginning with Alaska and Delaware in 1997 and Nevada in 1999; Missouri’s 1989 statute is sometimes cited as a forerunner. Their statutes differ, and practitioners compare them feature by feature. The first is the limitation period: how long a creditor has to challenge a transfer into the trust. A shorter period favours the settlor, a longer one the creditor. Nevada generally allows 2 years after the transfer, or for an existing creditor 6 months after discovery if later (NRS 166.170); Delaware generally allows 4 years, with a discovery rule for existing creditors (12 Del. C. §3572).
  2. The second is the list of exception creditors: claimants the statute’s protections do not bar. Delaware’s list includes certain claims for child support, alimony or a divorce property division, and tort claims existing when the trust was funded (12 Del. C. §3573). Nevada’s statute is commonly described as having none. Other states’ lists differ, and they change with amendments. A third feature is the standard of proof: Delaware and Nevada, for example, require a creditor to prove its claim by clear and convincing evidence, a higher standard than the usual civil one.
  3. The fourth is the settlor’s role. DAPT statutes generally require at least one trustee who is a resident individual of the state or a trust company authorized there, and do not let the settlor serve as that trustee. They differ on what the settlor may keep: Delaware’s statute, for example, lets the settlor keep a power to veto distributions (12 Del. C. §3570). Each retained power is a trade-off, because the more control a settlor keeps, the stronger a creditor’s argument that the settlor can bring the money back, the argument that defeated offshore settlors in the contempt cases in lesson 6.1.7.
  4. Fifth, practitioners compare state income tax and perpetuities rules. Alaska, Nevada and South Dakota, for example, have no state personal income tax, while other states tax some trust income under rules that can turn on where the trustee or beneficiaries live. A self-settled trust is often a grantor trust for federal income tax, so its income is generally taxed to the settlor, and the settlor’s home state may tax it too. On duration, South Dakota has declared the common-law rule against perpetuities not in force (SDCL 43-5-8) and Nevada allows interests to vest within 365 years (NRS 111.1031), which matters only if the trust is meant to last for generations (lesson 5.3.1).
  5. State choice has limits no statute can fix. A DAPT state cannot stop other states’ courts, or federal courts, from hearing a creditor’s claim: in Toni 1 Trust v. Wacker (Alaska 2018), the Alaska Supreme Court held that Alaska’s statute claiming exclusive jurisdiction over such claims could not bind Montana’s courts or a federal bankruptcy court. A court in the settlor’s home state may also apply its own law: in In re Huber (Bankr. W.D. Wash. 2013), a Washington resident’s Alaska trust was judged under Washington law, which does not protect self-settled trusts. And in bankruptcy, 11 U.S.C. §548(e) applies whichever state’s law governs the trust.
  6. Practitioner surveys collect these features in one place. The best known is Steve Oshins’s Domestic Asset Protection Trust State Rankings Chart, first published in 2010 and updated in later editions; it scores states on weighted factors chosen by its author. Such charts are practitioner surveys, not law: the weights reflect one person’s judgment, a chart can lag behind amendments, and a high score measures how favourable a statute is to settlors, not whether a given trust would survive a challenge. Cite the edition and year of any chart. This lesson describes what is compared; it does not suggest any state or suggest creating a trust.

Key facts

  • Alaska and Delaware enacted the first DAPT statutes in 1997 and Nevada followed in 1999; Missouri’s 1989 statute is sometimes cited as a forerunner.
  • A shorter limitation period for challenging transfers favours the settlor: Nevada generally allows 2 years (NRS 166.170), Delaware generally 4 (12 Del. C. §3572).
  • Delaware lets certain support, alimony, divorce property and pre-existing tort claims reach a DAPT (12 Del. C. §3573); Nevada’s statute is commonly described as having no exception creditors.
  • DAPT statutes generally require a resident individual or in-state trust company as trustee, and differ on powers the settlor may keep, such as Delaware’s distribution veto.
  • In Toni 1 Trust v. Wacker (Alaska 2018), Alaska’s claim of exclusive jurisdiction over fraudulent transfer claims could not bind other states’ courts or federal courts.
  • Practitioner rankings, such as Steve Oshins’s DAPT State Rankings Chart (first published 2010), are surveys reflecting their author’s weighting, not law; cite the edition and year.

Exercise nine, six, three, one

9CollectList up to 9 features of one or two DAPT statutes you are reading about (some lists are shorter), such as the limitation period, exception creditors, standard of proof, trustee requirements, powers the settlor may keep, state income tax and perpetuities rules.
6ClusterSort them into 6 categories: limitation period, exception creditors, standard of proof, trustee and settlor roles, tax, and duration.
3DistillReduce the 6 categories to 3 groups: features that change what a creditor must prove or by when, features that change who controls the trust, and features you would check in the current statute or with an adviser.
1CrystallizeWrite 1 sentence explaining, in your own words, why a high score on a practitioner chart does not show that a particular trust would survive a creditor’s challenge.

Fact check

Dates, figures and claims checked against the published sources listed below.

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