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So you’re interested in asset protection and you’ve heard about Utah’s Domestic Asset Protection Trust (UDAPT).  McCullough Sparks has years of experience creating asset protection trusts and can create a better, more effective UDAPT. While a UDAPT has some wonderful benefits, it is critical to know about some key disadvantages to a standard UDAPT which leave assets exposed, such as bankruptcy or a lawsuit in another state. McCullough Sparks can create a UDAPT that eliminates these disadvantages and provides the better asset protection. The purpose of this article is to discuss the potential uses, advantages and disadvantages, and explain how to build a better UDAPT.

Although Utah has had a UDAPT statute for many years, the latest revision which took effect in May 2013 changed everything by making the UDAPT a practical and powerful tool. Currently 16 states have DAPT statutes. Utah’s UDAPT statute is arguably one of the best.

Potential Uses for a UDAPT:

A UDAPT can be used to protect a variety of assets for anyone. A UDAPT can protect home equity, other real property, savings, business interests, and other investments. Anyone who wants to protect what they’ve worked hard for in the event of an unforeseen liability could benefit from a UDAPT done properly. Those particularly interested may be business owners, doctors, dentists, or others with high professional liability exposure.

Advantages of a UDAPT:

  • A settlor can create an irrevocable trust and transfer assets into it. Utah law provides that the settlor’s creditors can’t get the assets, even if the settlor is also a beneficiary (so long as there wasn’t a fraudulent transfer into the trust).
  • No limit on the amount of assets transferred into the trust (so long as the transfer doesn’t make you insolvent).
  • The trust can allow the settlor to live in a residence owned by the trust without exposing the property to creditor claims.
  • Trustee can be a Utah individual or a professional/institutional trustee.
  • The settlor can act as a co-trustee with authority to manage the trust assets in all respects other than to make distributions to beneficiaries.
  • Immediate protection from creditors that arise AFTER a transfer into the UDAPT. No statute of limitations waiting period to protect from claims of future creditors.
  • The relatively short 2 year Statute of limitations period for pre-existing creditors can be reduced to 120 days by notifying creditors.

Disadvantages of a UDAPT:

 There are two critical disadvantages to the any DAPT including the UDAPT

  • Bankruptcy – The Federal Bankruptcy Code disfavors self-settled trusts under Section 548(e) which allows the trust assets to be subject to the bankruptcy within the first 10 years after transfer to the trust. DAPT statutes are relatively new. There are currently only two published cases challenging DAPTs. In both cases, the DAPT failed to protect the assets in bankruptcy (See Section 548(e), In re Mortensen, Battley v. Mortensen and Waldron v. Huber (In re Huber))
  • Lawsuits outside Utah – While Utah and 14 other states have DAPT statutes, if you get sued in a state that doesn’t allow DAPTs (such as California), the creditor might be able to get a judgment against the trust under the laws of that non-DAPT state. There are several court cases showing that other states will apply their own laws as opposed to those where the trust was formed which leaves the UDAPT vulnerable if you’re sued in a state that does not allow DAPTs.

Building a Better UDAPT:

A standard UDAPT may help protect assets in the event that you don’t get sued in another state and you don’t expect to go bankrupt. However, McCullough Sparks has a unique trust technique that utilizes the benefits of a UDAP while also protecting in a future bankruptcy or out of state law suit. Our trusts are supported by generations of court precedent. Our trusts have survived challenges in lawsuits, bankruptcies, and IRS audits. Our trusts will work under a challenge in Utah or in any other state or in bankruptcy.