Utah: More Than Just A Great Place To Ski
By: Morris Law Group - February 05, 2015
We’ve written a lot about Domestic Asset Protection Trusts (“DAPTs”), and it’s no secret that there is an ongoing debate about whether DAPTs will be upheld in states that don't have statutes authorizing them. What is very clear is that we don't really have enough case law to know if DAPTs will work for clients who live in states that don’t specifically have DAPT statutes. This lack of certainty is the main reason that some attorneys strongly prefer offshore structures.
While there is a clear way to get all the benefits of both worlds (i.e. the relative easy administration of DAPTs and the stronger protections of offshore asset protection trusts), the purpose of this article is to highlight the weakness of all asset protection trusts and domestic planning structures and to suggest use of a relatively new mechanism for shoring up that weakness.
Asset protection works beautifully when it's put in place proactively (i.e. when you don't have potential lawsuits looming or any types of claims against you). Unfortunately, that’s also the most difficult time to convince people that they need to put a plan in place, because when things are going well, who wants to anticipate the opposite?
There’s just one small problem with that mentality, and it’s called a fraudulent transfer.
Fraudulent transfer laws prohibit any transfer of assets that is intended to hinder, delay, or defraud a legitimate existing or even a future unknown creditor. This means that once you’re on notice of a claim, it’s too late to create and fund a DAPT or even an offshore trust. Nonetheless, in some circumstances it makes sense to create and fund a trust even after one is aware of a creditor claim, because the burden is on the creditor to show that a fraudulent transfer was intended and actually occurred, and carrying that burden typically costs a lot in legal fees and litigation expenses. In other words, this type of reactive planning can create a strategic hurdle. However, if the creditor prevails, those legal fees are typically recoverable from the person who made the fraudulent transfer, so this type of move requires a serious risk-reward analysis.
But how can one avoid making a fraudulent transfer to begin with? First, there are certain “badges of fraud” that should be avoided. These include suspect timing of transfers (e.g. transfer made after a lawsuit is filed), transfers for less than full value, transfers that render the transferor insolvent, transfers to close family members, and retention of possession or the benefit of property that was transferred. Avoiding these badges of fraud does not guarantee success if a fraudulent transfer is asserted, but it goes a long way toward showing good faith.
The State of Utah has also come up with an interesting statute regarding fraudulent transfers and has provided individuals with a mechanism for avoiding any assertion that a fraudulent transfer has occurred. As part of Utah’s DAPT statute, individuals can shorten the statute of limitations-the period of time during which a creditor can claim that a fraudulent transfer occurred-from two years to 120 days by providing actual notice of transfers to existing potential creditors and by making a publication to unknown future creditors. This means that if a fraudulent transfer suit isn't filed within four months of a transfer of assets to a Utah DAPT, the claim will be forever barred!
The effect of this law is to virtually eliminate the one real weakness inherent to all types of asset protection planning. In essence, anyone using a Utah DAPT can effectively eliminate the possibility of a future fraudulent transfer legal proceeding in Utah. This doesn't mean that one can completely avoid the issue of fraudulent transfers, because a creditor could still file suit in a state other than Utah, but it does provide an added measure of protection and is certainly a step in the right direction.
Utah’s relatively new DAPT statute has many other innovative features that compare favorably against the more well-known DAPT statutes (e.g. Delaware, Nevada, and Alaska), so it looks like Utah is more than just a great place to ski these days. It’s also a great place to protect your wealth.
Please feel free to call the Morris Law Group at 561-750-3850 or contact us via our website if you have questions on DAPTs, offshore trusts, or asset protection in general.
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