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Asset Protection Trust Planning

Domestic Asset Protection Trusts (DAPTs) – available only in a small number of states, including South Dakota – are a formidable planning strategy that legally shields assets from third-party liability (including spouses in a divorce proceeding) and lawsuits while permitting settlors (the person establishing the trust) to retain some control over the trust assets and enjoy a discretionary benefit during their lifetime.

Therefore, an individual can establish a DAPT that is fully discretionary, meaning settlors can receive financial benefit from the trust (income and discretionary principal distributions), and protect trust assets from creditor claims and lawsuits, while maintaining control over the investment management function through the directed trust structure. South Dakota has one of the oldest and most progressive self-settled domestic asset protection provisions in the United States. With its two year “look back” fraudulent conveyance statute, South Dakota’s provision is among the shortest in the country.

Best Situs for DAPTs in 2023

In the December 2022 issue of Trusts & Estates Magazine, authors Mark Merric and Daniel G. Worthington closely and objectively examined domestic asset protection trust statutes in the context of various factors including a state’s discretionary support trust statute, anti-alter ego statute, and the DAPT statute.  Of note, South Dakota is the only state appearing in the first tier in all three comparative data point categories, while Delaware, Wyoming and Alaska fell to second tier or below in at least one of the three categories. This well supported and objective conclusion again accentuates the vital importance of selecting the proper trust jurisdiction in the planning process.

Click here for the full article: “Best Situs for DAPTs in 2023.”

In addition to positive recognition by Trusts & Estates Magazine, favorable case law has been generated in South Dakota supporting that state’s asset protection statutes.

The Supreme Court of South Dakota in In re Cleopatra Cameron Gift Trust “rejected even the specter of an argument that would allow support creditors to reach trust funds protected by a spendthrift provision.” A California judgment pierced the spendthrift provision of a third-party trust moved to South Dakota by the grantor. South Dakota rejected the enforcement of a California claim in South Dakota, where the legislature has rejected such enforcement. As such, the South Dakota Supreme Court held that a South Dakota Court wasn’t required to submit to a California judgment to compel payments from a trust because the method of self-executing enforcement wasn’t authorized by South Dakota law.

Terry Prendergast, one of South Dakota’s most respected and prolific trust attorneys who has worked on the creation and modification of South Dakota modern trust law for several years, observes that, “this latest article again makes clear that considering overall state policy and potential challenges, both the statutes in South Dakota and the South Dakota judiciary as shown in the Cleopatra Cameron case make South Dakota the jurisdiction of choice for the best asset protection. While some states may be with South Dakota in the top-tier of one of the features (a) discretionary support trust statutes (b) anti alter ego statutes and (c) DAPT statutes, South Dakota stands alone in the top-tier of all three categories, and with the Cameron case recently decided, the judiciary follows this strong public policy that a grantor can determine to protect trust assets from a beneficiaries’ creditors. The legislative and judicial support coupled with the strong fiscal policy and no state income, estate or gift taxes make South Dakota a jurisdiction of choice for situsing trusts.”

South Dakota Advantage

Trusts & Estates Magazine’s findings regarding South Dakota’s domestic asset protection trust statute are particularly compelling when considered in conjunction with the fact that South Dakota:

  • Is the most fiscally sound among all top-tier trust jurisdictions.
  • Is generally regarded by most practitioners and academics, including Steve Oshins (a Nevada attorney) as being the best dynasty trust state and having the best decanting statute in the nation.
  • Unequivocally has the most robust privacy trust laws in the country, as pointed out by an article appearing in the December 2021 edition of Trusts & Estates Magazine comparing U.S. trust jurisdictions wherein the authors noted, “of the top-tier trust jurisdictions, South Dakota has the best trust privacy laws.”
  • Is one of only two top-tier trust jurisdictions with a Community Property Trust, a compelling tax planning tool for spouses.
  • Is the only state in the country with the Family Advisor, referred to as a “Trust Protector Light.”
  • Has one of the lowest insurance premium taxes in the nation at 8 basis points.

When all of these attributes are considered in the aggregate, South Dakota clearly emerges as the superior trust jurisdiction in the nation for both domestic and international families seeking sophisticated trust solutions. Be sure to review Bridgeford Trust Company’s well-researched chart comparing the leading U.S. trust jurisdictions, with a particular emphasis on areas that clearly distinguish South Dakota as the best trust jurisdiction in the overall analysis.

For more information on domestic asset protection and other modern trust laws, please contact Bridgeford Trust Company’s team online or by calling (605) 224-9189.

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McKonly & Asbury is able to offer an extension of trust and fiduciary services to our clients and friends of the firm through our partnership with Bridgeford Trust Company. As a fully independent trust company chartered in South Dakota, Bridgeford Trust Company provides conflict-free and innovative fiduciary services and progressive U.S. modern trust law solutions around asset protection, privacy, and tax planning to domestic and international families across the country and around the world.

You can learn more about Bridgeford Trust Company and the South Dakota Advantage at www.bridgefordtrust.com.

About the Author

McKonly & Asbury

McKonly & Asbury is a Certified Public Accounting Firm serving companies across Pennsylvania including Camp Hill, Lancaster, Bloomsburg, and Philadelphia. We serve the needs of affordable housing, construction, family-owned businesses, healthcare, manufacturing and distribution, and nonprofit industries. We also assist service organizations with the full suite of SOC services (including SOC 2 reports), ERTC claims, internal audits, SOX compliance, and employee benefit plan audits.

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