Academic journal article South Dakota Law Review

Domestic Asset Protection Trusts: Examining the Effectiveness of South Dakota Asset Protection Trust Statutes for Removing Assets from a Settlor's Gross Estate

Academic journal article South Dakota Law Review

Domestic Asset Protection Trusts: Examining the Effectiveness of South Dakota Asset Protection Trust Statutes for Removing Assets from a Settlor's Gross Estate

Article excerpt

Various states have enacted legislation allowing for the creation of self-settled spendthrift trusts in the last decade. This recent trend of legislation has given rise to domestic asset protection trusts ("DAPTs "). The enactment of DAPT laws in South Dakota and various other states has caused debate as to whether transfers to such trusts can be structured as completed gifts for federal gift tax purposes and whether the assets transferred to such trusts by a settlor can effectively be removed from a settlor's gross estate for federal estate tax purposes. This article will discuss why recent changes to South Dakota's DAPT statutes likely provide settlors the option of reducing their gross estates by making completed gifts to self-settled trusts sitused in South Dakota.

I. INTRODUCTION

Over the past several years, various states have enacted legislation allowing for the creation of self-settled spendthrift trusts. This recent legislative trend has given rise to domestic asset protection trusts ("DAPTs"). The enactment of DAPT laws in South Dakota and various other states has caused debate as to whether transfers to such trusts can be structured as completed gifts for federal gift tax purposes and whether the assets transferred to such trusts by a settlor can effectively be removed from a settlor's gross estate for federal estate tax purposes. While definitive answers remain unclear, certain private letter rulings from the Internal Revenue Service ("IRS") have offered support for the position that a settlor may make completed gifts and remove assets from his or her gross estate by transferring the assets to a DAPT provided the facts and the applicable state law are consistent with the letter rulings. (1) South Dakota, known for having some of the most progressive trust laws in the country, (2) first enacted its DAPT laws in 2005. (3)

Over the past few decades, there has been a "substantial concern[] held by Americans about the potential of financially devastating legal judgments." (4) In other words, Americans are worried about potentially losing large sums of money through litigation. For example, the number of lawsuits filed against physicians between 1956 and 1990 "rose from 1.5 claims per every 100 physicians to 15 claims per every 100 physicians." (5) Over the past several years, juries in the United States have awarded large verdicts with potentially devastating consequences to defendants. (6)

On the other hand, protecting one's assets can be difficult. Over the last one hundred years or so, trust laws in the United States have trended weaker and weaker. (7) For example, in the United States, as a matter of public policy, a trust's spendthrift provision was traditionally void with respect to the settlor's creditors where the settlor was also a beneficiary. (8) To obtain such protection, people in the United States were forced to establish trusts in offshore jurisdictions such as the Cayman Islands, Bermuda, or the Cook Islands. (9) These circumstances gave rise to offshore asset protection trusts ("OAPTs"). (10)

OAPTs are trusts settled under the laws of foreign jurisdictions that are advantageous to protecting assets from future creditors. (11) Offshore trusts provide two primary benefits: (1) strong spendthrift protection; and (2) the possibility for a settlor to control and/or benefit from the property held in the trust. (12) Offshore trusts gained popularity in the early 1990s after the Cook Islands codified their existence in 1989. (13) Shortly thereafter, other nations, including the Bahamas, Bermuda, and the Cayman Islands, implemented their own legislation in an attempt to attract the OAPT business to their countries. (14) In 2000, it was estimated that over two trillion dollars ($2,000,000,000,000) in assets were held in offshore trusts. (15)

As money poured out of the United States to offshore trusts, some stateside jurisdictions began taking the "if you can't beat'em, join'em" approach by developing their own set of settlor-friendly laws. …

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