Dr. Charles Dahl and his wife Kim were married for eighteen years. In 2002, Charles executed a trust entitled “The Dahl Family Irrevocable Trust” that named Charles as Settlor, his brother Robert as Investment Trustee, and Nevada State Bank as Qualified Person Trustee. The trust also named Nevada as the domicile (the state where the Dahl’s reside or intend to return to indefinitely) in its choice of law provision, even though Dr. and Mrs. Dahl lived in Utah.
That same year, Charles transferred 97% of Marlette Enterprises, LLC, a Utah limited liability company worth $935,996, to the Trust, keeping 1% for himself and 1% for each of the parties’ two children. A year later, Charles and Kim jointly deeded their primary residence (which cost over $1 million to build) to the Trust.
Charles filed for divorce in Utah on October 24, 2006. While the divorce action was still pending, Kim brought an action against him, seeking a share of the Trust assets, which she claimed were marital property. She argued that the trust was null and void, that she was a settlor, and that the trust was revocable, so that she would have rights to her portion of the primary residence that she deeded to the Trust in 2003.
Kim’s attorney fees and costs up until 2010 were $2,186,568, and initially the district court dismissed her claims. However, on appeal, the court ruled that Kim has the right to revoke the trust as to the portion to which she was the settlor and therefore has the power to take back that portion of the trust assets that were hers, as does Charles. The decision was due to the fact that the state of Utah does not currently have DAPT statutes, and that the state has a strong public policy interest in the equitable division of marital assets. Since the couple resided in Utah, Utah state law applied to the trust even though the stated choice of law in the trust was Nevada.
The Trust was intended to be a DAPT, not a Revocable Trust:
Domestic Asset Protection Trusts, or DAPTs, a spin-off of Offshore Asset Protection Trusts, (OAPTs), were created in 1997 as an effort to retain in the U.S. some of the wealth that had been steadily moving into OAPTs. A DAPT, like the LTP (Living Trust Plus™ Asset Protection Trusts), are legitimately used for asset protection planning to set aside a “nest egg” at a time when the settlor either does not have existing liabilities or such liabilities are covered by other assets. Most creditors cannot reach property in a DAPT, unless that property was fraudulently transferred to the trustee. I say “most creditors,” because this DOES NOT INCLUDE MEDICAID.
The DAPT Doesn’t Work
In the Dahl case, “The Dahl Family Irrevocable Trust” was intended to be a DAPT, given that it was established under Nevada law, with a Nevada co-trustee, has the word “Irrevocable” in its name, has the word “Irrevocable” in Section 5.5, and every other aspect of the trust appears to be what would generally be done with a DAPT. However, the Utah Court ruled that it was not a DAPT, and it was determined to be a revocable trust. A
A DAPT does NOT provide Medicaid Asset Protection:
Therefore, as I have been preaching for years, if you are considering a DAPT, take extreme caution, because this is a perfect example of why a DAPT simply can’t be counted on to work. Moreover, even if a DAPT did work as intended, the huge problem with DAPTs, which makes them essentially useless for a client or attorney desiring complete asset protection, is that these a DAPT is absolutely ineffective for Medicaid asset protection purposes. Complete asset protection includes Medicaid Asset Protection, as Nursing Homes are the most expensive and most likely creditor that most people will ever face.
Below is a quick comparison of the DAPT vs. the LTP:
| DAPT | LTP | |
| Settlor as Trustee | All DAPT statutes prohibit the settlor from serving as trustee of the DAPT, though the settlor may serve as an investment advisor with specific veto powers | The settlor of an LTP may serve as the trustee of the LTP |
| Residence of Trustee | All DAPT statutes require that the trustee (individual, trust company, or bank) be a resident of the DAPT state. | Under the Uniform Trust Code, the trustee of an LTP need not be a resident of the trust situs, but must merely have a connection with the designated trust jurisdiction |
| Location of Trust Assets | Most DAPT statutes require that a percentage of the trust assets be held within the respective state. | There is no limitation on where the assets of an LTP may be held. |
| Incorporation of State Law | The trust instrument must expressly provide that the DAPT state’s laws govern the trust, to ensure the DAPT state’s laws will apply if a dispute regarding the DAPT arises. | There is no such requirement governing LTPs. LTPs work in all 50 states for asset protection against normal creditors. They work in all states except Minnesota and Connecticut for Medicaid Asset Protection. |
| Settlor’s Retained Interests | Most DAPT statutes allow the settlor to retain interests including discretionary distributions of income; discretionary distributions of principal; veto power over distributions of income or principal; and/or limited testamentary powers of appointment. | The settlor of an LTP can retain interests including mandatory or distributions of income; power to remove and replace trustee(s); and limited testamentary powers of appointment. The big difference is that the Settlor of an LTP cannot retain any rights over principal. |
| Creditors Barred from Recovery and Limited Exceptions | Three types of creditors have statutory authority to attempt to pierce the DAPT and reach its assets: (1) creditors successfully alleging fraudulent transfer; (2) a spouse or child; and (3) tort claimants with torts arising on or before the date of the transfer to the trust. | Creditors cannot pierce the LTP to reach LTP assets in satisfaction of any judgment, although creditors can reach all of the income generated by the trust assets. There are no statutory or common law exceptions. |
| Trust Protectors | In a typical DAPT, a trust protector or independent trustee has absolute discretion concerning whether to make distributions to the settlor. This is important to prevent the settlor from being able to force distributions to himself. | Although a trust protector is not required in an LTP, it is typically recommended, and can be important for tax reasons if the trustee is also a beneficiary and the LTP authorizes the trustee to make distributions of trust principal to himself. |
Understanding Living Trust Plus™ (LTP) Medicaid Asset Protection Trust:
The Living Trust Plus™ (LTP) functions much like a Revocable Living Trust and maintains much of the flexibility of a Revocable Living Trust, but protects one’s assets from the expenses and complexities of probate PLUS lawsuits PLUS nursing home expenses while the creator of the trust is alive. The LTP protects the trust creator’s assets from lawsuits, medical expenses, and — most importantly for the 99.8% of Americans who are NOT among the ultra-wealthy — from the devastating costs of nursing home care.
For most Americans over age 65, an LTP is the preferable form of estate planning and asset protection because for purposes of Medicaid eligibility, this type of trust is the only type of self-settled asset protection trust that allows a settlor to retain an interest in the trust while also protecting the assets from being counted by state Medicaid agencies. For 99.8% of the population, why have an asset protection trust at all if you’re not protecting your assets from the devastating costs of nursing home care?
If you’re a client or potential client who would like more information about Living Trust Plus™, please register for one of our upcoming Living Trust Plus™ informational seminars. Our seminars teach attendees how to protect their assets from the expenses of probate and long-term care, how to obtain valuable Medicaid and Veterans benefits to pay for long-term care, how to protect assets from lawsuits, divorce, and long-term care creditors, and more. Reserve your spot today or call one of our offices to make an appointment for a consultation.
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About Evan H Farr, CELA, CAP
