Lawsuits are becoming more and more common these days, especially for people who conduct businesses that involve health, property, or the safety of the general public. The risk that a single judgment could put all of your hard work into the hands of a creditor can make even the most financially secure person understandably nervous.
Seemingly, in the blink of an eye, your assets could be handed to somebody else, often over some small technicality of the law. Of course, a legal process to obtain a judgment is required first. But judgments can be obtained in far away jurisdictions or against individuals who had no real responsibility for what caused someone harm.
While there is no way to guarantee that your assets will be protected from creditors and judgments, it can help to legally transfer property out of your ownership and into a trust. Trusts qualify as their own legal entity, and if the trust creator doesn’t legally have access to those assets, they can be significantly protected from most future claims.
One type of arrangement that is specifically structured for this purpose is a domestic asset protection trust or DAPT. Only a few states recognize the legal protections offered by a DAPT, but many, including New Mexico, can provide similar protections when they are well-structured from a legal standpoint. Any New Mexico DAPT would be recognized under general New Mexico trust law, even though there is no separate statute for a DAPT.
New Mexico Financial & Family Law can work with you to discuss all of your options for asset protection and estate planning. Call 505-503-1637 or contact us online to speak to a New Mexico domestic asset protection trust lawyer during a no-risk, confidential case review.
The way domestic asset protection trusts are created, funded, and managed is crucial for how well they will be able to perform their expected role. Without the right strategy and structure, all the work put into trust formation could still result in a creditor being granted access to the protected assets.
Worse, since a DAPT is irrevocable, once flaws are detected in the trust’s structure, they often cannot be corrected. Now, all of these valuable assets are placed out of reach of the grantor, creating more risk for them than ever before.
New Mexico Financial & Family Law wants you to have confidence in knowing that your assets are protected. We will start by reviewing your financial situation before going over your goals in detail, and then, we can present you with all available options to help make those goals a reality.
With our help, you’ll select the type of trust arrangement that is most likely to help you achieve your goals with respect to your unique financial situation.
In addition, we’ll help you make key decisions about how your trust will be funded and managed. Critical tasks, like choosing a trustee and projecting maintenance costs for the trust, will help reduce the risk of unexpected outcomes, ensuring that you can sleep soundly knowing that your assets are secure.
A domestic asset protection trust has four main components:
There are four other important qualities of domestic asset protection trusts that give them the capability to shield assets from claims while still allowing them to benefit the grantor:
Crucially, prior to the creation of DAPT laws in certain states, state and federal laws did not recognize protections for self-settling trusts. Because the trust creator could clearly use and benefit financially from the assets held in trust, that meant courts could effectively declare that the assets were still owned by the grantor, not the trust itself.
Now, individual states have signed into law protections for DAPTs, allowing trust grantors to reduce the expense, complexity, and risk compared to forming a trust overseas.
Foreign governments created asset protection trusts by passing laws creating favorable conditions for asset shelters, which were readily used by American corporations and well-invested individuals. By forming a trust in these countries, the asset holders could benefit from the robust protections offered by the country’s strict financial privacy laws.
Not only that, but these countries also tended not to enforce judgments made on United States soil, meaning that assets were difficult — if not impossible — to access.
The only drawback is that these offshore asset protection trusts (OAPTs) were difficult to set up, expensive to maintain, and somewhat unpredictable in terms of how available the assets would be for distributions as intended.
In response, many states started implementing their own unique domestic asset protection trust schemes, starting with Alaska in 1997. Now, 20 states offer some form of legislative protection for DAPTs and other self-settling trusts.
The following states have statutes explicitly governing the creation, use, and protections afforded by DAPTs:
In particular, financial planning attorneys regard the following states as providing the most robust protections for trust creators: Alaska, Nevada, Utah, South Dakota, and Delaware.
Note that the rules of each state and the protections offered by them vary greatly. Refer to a New Mexico trust attorney for help reviewing and understanding the laws of each state so that you can know what option is best for achieving your specific goals.
Currently, New Mexico does not have any statutes recognizing specific protections for self-settling, spendthrift trusts. At the same time, you can legally create such a trust, and doing so would make it very difficult for creditors to gain access to the assets held within it.
A common example is the Medicaid trust. Because state organizations typically recover the costs of certain long-term care programs from the estates of individuals who use them, it is in the best interests of your financial legacy to protect your largest assets by placing them outside of your ownership.
A Medicaid trust can prevent estate recovery if they are compliant with state law and have been funded with assets at least five years prior to the first request for Medicaid-funded services.
Depending on your circumstances, you may want to form your asset protection trust in another state or overseas. You may also want to choose an alternative structure for your trust, such as naming someone other than you as a beneficiary.
While there is no 100% guaranteed option for asset protection in any state, there are many choices you can make that can help you find the optimal path for protecting your financial legacy.
The protections and limitations of a DAPT depend entirely on the laws of the state in which it is formed. It’s also equally important to review that state’s history of court rulings on creditor disputes involving self-settling trusts with spendthrift provisions.
In nearly every state, a domestic asset protection trust won’t protect from any of the following:
Currently, Nevada is the only state where debts owed as a matter of public policy (i.e., alimony, child support) cannot create an exception in order to access funds held in a DAPT.
A domestic asset protection trust is not the best choice for everybody.
In the words of the American Bar Association:
“The best candidate for a DAPT is a client who has surplus assets after he or she performs a realistic assessment of his or her existing and foreseeable assets and liabilities. The worst candidate is a client who has (or is about to incur) a large obligation and wants to hide assets to avoid paying it.”
Creditors may be able to access funds in a trust if they can prove that the grantor — either deliberately or unintentionally — left themselves unable to pay off debts because they transferred too many assets into the trust.
Grantors are expected to make a liquidity analysis prior to funding their domestic asset protection trust. They must determine an appropriate amount of assets to transfer so that they are not reasonably at risk of being unable to pay debts.
Many courts will scrutinize the grantor’s judgments about liquidity closely. If they feel that the grantor took on too much financial risk in order to fund the trust, leaving them unable to pay known or likely debts, then they could give creditors permission to access the funds held in the trust.
To prevent this outcome, work with a New Mexico domestic asset protection trust attorney to perform a detailed financial analysis and arrive at a decision for funding your trust that won’t jeopardize your future liquidity.
There is the general expectation that, if you are going to form a trust in a particular state, you will fund the trust with assets that are either:
These laws aim to prevent someone from essentially “offshoring” their assets to a state where they have no legal, financial, or business interests. Again, expect your financial/business history and the history of the assets to be scrutinized closely by courts.
If the courts find that the trust was created merely to avoid laws in another, less-protective state, they may allow that state’s laws to supercede their own, giving creditors access to the trust.
Another important limitation to consider is that courts will look closely at how the assets held in a trust are actually used.
Ideally, all assets placed into the trust will be legitimately set aside, meaning they cannot be used or accessed by the grantor until or unless they have been distributed to them. If, on the other hand, the grantor can still access the assets at any time or benefit from their “possession and enjoyment,” then the assets may be considered to be still owned by the grantor, not the trust.
An obvious example is a vehicle: if a vehicle is placed in trust but is still used by the grantor on a regular basis, then there has been no legitimate separation of assets from their control. Instead, the grantor can still derive enjoyment and use from the asset at any time, blurring the lines on whether the trust actually owns it.
All income distributed to beneficiaries from a DAPT counts as personal income for federal tax calculation purposes. You may also owe state taxes on this income, either in the state where the trust is registered or in your home state, depending on how the trust is structured.
It may also be possible that you reduce taxes when income is derived from the trust when using more generous tax laws of another state, but be sure to discuss this with your New Mexico domestic asset protection trust lawyer to clarify.
Appreciation of assets held in trust may trigger federal trust income taxes or capital gains taxes, depending on the assets and the structure of the trust, but again speak to a knowledgeable attorney to verify.
Yes. A provision in a will can create and fund a trust on behalf of the deceased testator using assets held within their estate.
However, creating a trust in this way can still make the assets subject to probate. Further, claims against the decedent’s estate may be able to intercept the assets prior to their legal transfer.
As such, it may be best to go ahead and create a domestic asset protection trust while the property owner is still alive, allowing for the property to be separated from their estate.
At New Mexico Financial & Family Law, we’ll help you understand all of the options you have available for trust formation and asset protection, with consideration for your unique financial situation and goals. Our New Mexico domestic asset protection trust lawyers have decades of experience and extensive knowledge of estate planning vehicles of all types.
Reach out to our New Mexico domestic asset protection trust law firm to schedule a case review, with no obligation to continue working afterward. Discover your unique path to financial security and confidence when you call our firm today at 505-503-1637 or contact us online.
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