Domestic Asset Protection Trusts Versus Prenuptial Agreements: What Is The Best Option?

What Are Domestic Asset Protection Trusts?

Domestic Asset Protections Trusts ("DAPTs") are irrevocable trusts that can be established in states that have special laws for this very specific type of trust. DAPTs allow the settler of the trust to be a discretionary beneficiary while still protecting the trust's assets from the settlor's creditors.1 In reality DAPTs are not solely a tool for protecting your assets during divorce, but have been a way for wealthy families and individuals to shield their assets from creditors.2 This type of trust can be a useful tool in assisting your clients in protecting their assets. DAPTs also allow clients to transfer property using their annually exclusion gifting ability to take assets out of the estate and freeze them in a trust account.3 This type of trust account does not require the person creating the trust to be a resident of the state where it is being established. Therefore, for individuals who live in a jurisdiction without DAPTs, they can still benefit from this type of asset protection. DAPTs also act as an alternative for offshore trusts that in the past have been a popular asset protection strategy. There are some drawbacks to foreign trusts that leave them open to being unprotected. One of these is merely not having the ability to accurately predict what will happen with a foreign jurisdiction's laws or if things will rapidly change due to political unrest or other issues that might be less of a concern on domestic soil.4

Prenuptial Agreement: Overview

Prenuptial agreements ("prenups") are made prior to the marriage. They specifically set out what property or financial assets each spouse is entitled to in the event of divorce. Prenups are often used by a wealthy spouse to protect his or her assets, but can also be used to protect family businesses.5 In addition, prenups can be used to protect one party from assuming the debt of the other party, determine how property will be passed upon death, clarify financial rights and responsibilities during marriage, and avoid long and costly disputes during the divorce.6 In most jurisdictions, if you do not have a premarital agreement, your spouse is entitled to share and receive ownership of property acquired during the marriage, receive some of your property upon death, share in any debts acquired during the marriage, and share responsibilities in managing property acquired.7 Prenups are privately drafted either by the individual or by the party's attorney. The other spouse can either participate in the drafting with their soon-to-be spouse's attorney or have an attorney of their own review the agreement. The court does have final review of prenups by closely analyzing them. The judge is analyzing the agreement for fairness and compliance with the state law guidelines.8 These agreements are a nature of contract law and therefore must be absent duress or fraud in order to be valid. Prenups must also be in writing to be legally valid; and they must be signed voluntarily by both individuals in the presence of a notary public.9

Comparison:

In many instances, DAPTs have many benefits that are unique, helpful and may outweigh the benefits of obtaining and getting a prenuptial agreement. One downside to prenuptial agreements is the inability to predict what will happen during the course of the marriage and what gains or losses will be suffered by each person in the relationship.10 Therefore, this makes drafting a challenge and can lead to harm for many years down the road when the assets to the marriage or assets obtained by each individual person is vastly different than when the client sat down with their soon-to-be ex-spouse and created this premarital contract.11 In addition to the unforeseeability of what will happen during the course of the marriage, there can be problems with the actual terms of the premarital agreement.12 During the drafting phase prior to marriage, individuals are often in the "honeymoon" stage that can lead your client to agree to terms or compromise on certain issues that are not actually in their best interest.13 While a premarital agreement is intended to protect your client in the case of a divorce, someone who is happy and in love in their soon-to-be marriage is not able to really grasp the concept and the ramifications of an abrupt and traumatizing end to the marriage either through death or divorce.

Unlike a premarital agreement that becomes a contract prior to marriage, a domestic asset protection trust can be set up at any time, including after the parties have married. This is beneficial to those who may not be able to think about the ramifications of divorce at the outset, but a number of years might be in a different frame of mind regarding the marriage or the potential longevity of the relationship. Your client should be aware that they should set up this type of trust prior to filing for divorce and before it is obvious that the relationship is headed to divorce. Asset transfers while a divorce is pending or immediately before a divorce is filed may lead a court to invalidate the transfer as a fraudulent transfer to intentionally shield assets in which your client's spouse would otherwise be entitled.14 Depending on the state that the DAPT is settled in, it might provide for less liability to your former spouse than a prenuptial agreement. While it may sound like a DAPT is the most beneficial option, it may be even more beneficial for individuals to also have a prenuptial agreement. Using these asset protection tools in combination may be the best way to protect your assets from an adverse divorce judgment. This is only proper for forward thinking individuals who seek asset protection prior to marriage. If only one method of asset protection is being used, then the favored one is often DAPTs in states that allow them.

____________

1 Steven J. Oshins, Esq., The Domestic Asset Protection Trust, Wealth Counsel,

(viewed March 11,2015). http://www.wealthcounsel.com/newsletter/january2013/steve-oshins-the-domestic-asset-protection-trust/

2 Robert Pagliarini, How to Protect Yourself in a Divorce Using a Domestic Asset Protection Trust, (viewed March 11, 2015). http://www.forbes.com/sites/robertpagliarini/2014/05/15/how-to-protect-yourself-in-a-divorce-using-a- domestic-asset-protection-trust/

3 DOMESTIC ASSET PROTECTION TRUSTS CREATED BY NONRESIDENT SETTLORS, 32 ESTPLN 17, 1

4 Christopher M. Reimer, International Trust Domestication: Migrating an Offshore Trust to A U.S. Jurisdiction, 25 Quinnipiac Prob. L.J. 170, 172 (2012).

5 Find Law, Can Prenuptial Agreements Help You? (viewed March 16, 2015). http://family.findlaw.com/marriage/can-prenuptial-agreements-help-you.html 6 Id.

7 Id.

8 Id.

9 Rocket Lawyer, Premarital Agreement Basics, (viewed March 16, 2015). https://www.rocketlawyer.com/document/premarital-agreement.rl?e=2449570629a

10 Wanda Marie Thibodeaux, The Pros and Cons of Premarital Agreements, (viewed March 16, 2015). http://www.prenuptialagreements.org/pros-cons/

11 Id.

12 Id.

13 Id.

14 Robert Pagliarini, How to Protect Yourself in a Divorce Using a Domestic Asset Protection Trust, (viewed March 11, 2015). http://www.forbes.com/sites/robertpagliarini/2014/05/15/how-to-protect-yourself-in-a-divorce-using-a- domestic-asset-protection-trust/