Asset Protection Trusts vs. Voidable Transfers

Asset Protection Trusts provide a way, under the right circumstances, for people to protect assets from the collection efforts of their creditors.  Protecting existing assets may be especially important for high-net-worth individuals, entrepreneurs and people who work in professions that place them at higher risk of being sued.

The Utah legislature has been at the forefront of adopting laws that allow for the formation of Asset Protection Trusts in Utah, with the idea that doing so will encourage entrepreneurship in Utah and thereby enhance its economy.  However, it is not entirely clear how the legislation permitting the formation of Asset Protection Trusts interacts with Utah’s Voidable Transfers Act (formerly the Fraudulent Transfers Act), which is designed to undo transfers made for the purpose of hindering, delaying or defrauding legitimate creditors and their efforts to collect what is owed to them.  Clearly, this involves a delicate dance between two competing public policies, and the Utah legislature has made, and continues to make, efforts to amend its prior legislation to strike the right balance.  Notably, few states who have adopted asset protection trust legislation have also adopted the Uniform Voidable Transfers Act (the “UVTA”), probably because of the competing interests involved.

In order to give your assets the best chance for protection from your creditors, you must strictly comply with the requirements of the Asset Protection Trust statute.

The Utah Domestic Asset Protection Trust

In Utah, you can legally transfer assets to a domestic (as opposed to foreign) asset protection trust (DAPT) for the purpose of preserving and protecting assets.

The DAPT structure, at least in theory, prevents creditors from seizing and selling assets such as your home, your business, real estate holdings, securities, etc. in the event of a judgement against you.  These protections are not provided by most standard trusts, such as a revocable living trust.

A DAPT arrangement can provide critical protection for individuals who work in high-risk professions – medical practitioners, for example – or who have significant accumulated wealth.

Utah law allows you to appoint yourself (and/or others of your choosing) as the beneficiaries of the DAPT, but requires you to appoint a trustee other than yourself to oversee most kinds of distributions of money or property from the DAPT.  However, you can appoint anyone you choose, regardless of their relationship to you, to be the distribution trustee of your DAPT, so long as at least one trustee of the DAPT is a Utah resident or a Utah Trust Company.

Potential Risks Associated with Asset Protection Trusts

As ideal as having a DAPT sounds, it is not without its downsides.  First, you must be meticulous in setting up your DAPT for it to provide the protections you want.  Not only does your trust document have to contain all the right provisions to comply with the statute and receive the desired protections, but you must also sign a sworn affidavit to the effect that, among several other things, transferring your assets into the DAPT will not make you insolvent (i.e., you won’t be left with more debts than assets), and that the transfer is not with intent to hinder, delay or defraud a known creditor.

Second, you no longer own the assets you place in the DAPT; the DAPT does.  And, you can’t just pull assets out of the DAPT whenever you want.  Distributions must be controlled by the distributions trustee, who can’t be you, and the DAPT cannot be revoked, amended or terminated, in whole or in part, and you can’t withdraw property from the DAPT, “without the consent of a person who has a substantial beneficial interest in the trust,” i.e., another beneficiary, whose “interest would be adversely affected” by the revocation, amendment, termination or withdrawal of property.

Third, because DAPTs are rather novel, although more typical irrevocable trusts have been around for a long time, you may encounter difficulties when dealing with third parties, such as lenders or purchasers of assets from the DAPT (proceeds from loans against or sales of trust property typically would need to remain inside the trust).

Fourth, the DAPT will not protect from your creditors any distributions the trust make to you.  The assets are only protected so long as they stay in the trust.

Finally, there is still some uncertainty with respect to the interplay between the DAPT enabling statute and Utah’s Uniform Voidable Transactions Act (UVTA).  For instance, the DAPT statute provides asset protection within a relatively short amount of time, especially if you inform your existing creditors of what you’re doing and they don’t act to prevent it, while the UVTA provides up to a four years for creditors to file a lawsuit to undo a transaction.  Transfers into a DAPT that are not in complete compliance with the DAPT statute, including the apparently implicit requirement that the contents of the required affidavit be true, likely will still be subject to being undone under the UVTA.

An Asset Protection Trust May Be an Important Part of Your Comprehensive Estate Plan.

At least in theory, assets you transfer to a DAPT are safe as long as, at the time of the transfer, you have complied with all the statutory requirements and the statutory waiting period has passed.  However, waiting to transfer assets into a DAPT until after someone already has a significant judgment against you, or even while you are in imminent fear of a lawsuit against you that has a good chance of resulting in a significant judgment against you, leaves your assets at risk of being clawed back out of the DAPT as voidable transfers under the UVTA.

The lesson we must take away from this discussion is one of judicious timing.  If you have not yet begun the process of formalizing a comprehensive estate and asset protection plan, the time to start is now. None of us knows what the future holds.  You have worked hard to build your financial strength and you have the right to protect your assets. Proper planning – with the assistance of a Utah estate planning attorney – will help ensure the protection of your hard-earned assets, and the disposition of those assets according to your wishes after your death.

Located in Salt Lake City, at J.D. Milliner & Associates we assist clients throughout Utah with their business, estate and divorce law needs. Contact us today to learn more about how we can assist you with Asset Protection Trusts and other estate planning services.

NOTE: This article is for informational purposes only and should not be construed as providing legal advice. Use of this site does not create an attorney-client relationship. Contact an attorney to obtain legal advice

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