As a licensed attorney with a practice in trusts, I am almost daily addressing the aspects of trusts and determining whether or not a trust would be beneficial for each individual client. It is my belief that if my clients are seeking a comprehensive understanding of trusts – basic or advanced – then a lot of other people who would appreciate a deeper understanding of trusts and how a trust may be of value for their own particular situation will value a frank explanation and discussion on the subject of trusts. In drafting subsequent trust articles and considering questions a person should ask a legal advisor prior to entering into a Domestic Asset Protection Trust, the editorial team and I discussed this objective and the various uses and implementation of trusts. The editorial team was in agreement that the topic would best be served by starting at the beginning with an introduction article explaining the evolution of DAPT in the United States and the ability to use a DAPT for a person’s income and asset protection.
How did it all begin?
Trusts were first derived under the Statute of Uses in England in1535. Prior to 1535, the legal real property practice was for landlords (landholders) to pay a type of land-royalty fee to the King. As you may know, land in England was fundamentally owned by the King and landlords could buy leaseholds from the King in his capacity of freeholder. These leaseholds could span a period of years exceeding 99 years. Oddly, the real property laws of England and many of its then colonies still use this land ownership of freehold and leasehold. Under King Henry VIII’s reign these payments were exacted from landholders and upon the death of a landholder the King could exact additional fees, like an inheritance tax, from the heir. Landholders began transferring their leaseholds into the name of one individual but for the benefit of another. This transactional party above would be termed the cestui que use and become the person benefiting from the use of the land, but was neither the initial landholder nor the heir of the landholder.
Under this plan, there arose a type of land ownership termed “use”. This idea caught on quickly across the English country side and it was not long before the courts of England recognized this use right allowing the landholder to transfer possession of the land to one individual for use of the land while transferring legal title to another. Transferring title to land to two or more individuals, the landholder was also able to avoid other fees such as marriage fees and other fees associated with the death of a landholder. If the property was held in other persons’ names, a landholder could also avoid losing the property due to debt or felony conviction. By the end of the fifteenth century, almost all of the land in England was owned in use.
Like any government that is dependent upon revenue generation to run its country, England was no different. The King, King Henry VIII at that time, was a very determined monarch and personally pushed through Parliament a special law designed to stop this loss of money for the Realm. This law was termed the Statute of Uses. This legislation terminated the short historic bifurcating of land rights between use and title, as I noted above. This legislation also acted to transfer full title to land automatically to the individual that was using the land as well as a reinstatement of the draconian feudal rule of primogeniture, which held that land should go to the oldest son upon the death of the landowner. Predictable, landholders vigorously abhorred this legislation and after a protracted and focused lobbying by the landholders the King scrapped the legislation. However, just five years later, Parliament enacted the Statute of Wills which gave rights to the landholders to pass property at their own discretion in the form of a written will and testament. Parliament did not rescind the Statute of Uses. Now not only were the landholders appalled but the courts were equally enraged.
Somewhat similar to modern circumstances, landholders began a period of creativity by finding and exploring loopholes in the legislation and the court also responded by using strict construction of the unfavorable legislation by allowing landholders to place property in the title of another individual while simultaneously retaining use of the property for their own use, benefit and profit. It was ultimately the courts that expanded this practice of the landholders into a concept of trust whereby a vehicle labeled a land trust allowed one individual to hold title to the land for the benefit of another individual who may direct the management and use of the land. The courts went on to reason that a trust allows the landholder to have some ability to use the land and that the person who received the transfer of the land performed no labor on the land and had no real function to the land, except to hold title. Thus, this individual became known as the “trustee”. The courts further reasoned that the trust was recognized in the courts of equity, but not in the courts of law. Thus, trusts had no jural ability to be sued or to sue in courts of law. This notion still exists in England as well as the United States.
From 1535 to 2010
This equity v. legal fiction above has presence in today’s world. Traditionally, a litigant cannot file against a trust because the trust lacks any legal recognition in courts of law. This non-existent legal entity status causes the litigant to bring a claim against the trust indirectly by suing the trustee under the trustee’s personal capacity. The trustee may seek some type of reimbursement from the trust after the litigation is concluded for fees and costs and hope the trust will have sufficient assets to meet these reimbursements. Currently, all states of the United States via legislation, with the exception of Mississippi and West Virginia, have modified this traditional law by adopting either the Uniform Trust Code or the Uniform Probate Code, or similar statutes, separating the trust entity from the trustee, severing the liability of the trust from the liability of the trustee, and allowing suit against the trustee in its representative capacity as opposed to its personal capacity.
Modern trust law evolves from state legislation and state case law and allows an individual to protect much more than land ownership and land use. These recent Domestic Asset Protection Trusts, DAPT, are trusts that protect a variety of real and personal, tangible and intangible, assets from creditors, some states also include as a future spouse. APT allows the individuals establishing the trust and funding the trust, settler, to include themselves as a possible beneficiary of the trust; which trusts are also called “self-settled trusts”. DAPT are an excellent estate planning instrument that should not be overlooked, a viable form of real asset protection to shield against attacks of the settler’s future spouse and other creditors with the provision that the DAPT does not violate a particular state’s fraudulent transfer laws. DAPT would have had significant use for our current adultery-minded mega movie and sports stars. DAPT requires no disclosure of the trust structure and no disclosure of what assets a replaced within the trust.
If, for example, a mega-star set up a DAPT in one of the states that permits this type of DAPT before marriage, upon a dissolution of marriage the assets are protected from then on – the adulterer spouse and lesser income earning spouse will not be a part of an equitable distribution. Therefore, public knowledge of these assets are not revealed in court records, and the outcome will be significantly better than an antenuptial agreement which may be public and may ultimately fail in a divorce proceeding.
DAPTs are utilized by individuals, entities, and families as an inherent part of their financial, income and asset lifetime perpetual efforts to bring about a diminishment of fear, uncertainty and doubt over the professional management and preservation of these three types of assets during your life, while assets are in probate or administrations and after death, probate or administration. These fear factors exist with us in our everyday lives. According to Enrichment Journal on the divorce rates in America, the divorce rate in America for first marriage is 41%; the divorce rate in America for second marriage is 60%; the divorce rate in America for third marriage is 73%.
While DAPTs have their place in traditional estate and asset protection planning, they are certainly not the end all to be all. They can be an instrumental tool in a planner’s toolbox. As Tim Berry pointed out in his most recent article that America and Americans are the most litigious society on the planet and anything can happen at anytime. Just a simple innocent act can cause injury or damage which can find its way into our court system and from there a claim against you with subsequent interrogatories asking intrusive personal questions to the plaintiff and the plaintiff attorney can determine how deep your financial pockets are. Proper and legal DAPT planning can help to protect personal assets from legal threats, including threats arising from business, professional and commercial activities; regulatory liability; and personal and family activities. DAPT planning is also necessary even when you have insurance; given the policy narrow coverage scope, exclusions, exceedingly small coverage, premiums increasing each year, insurance companies dropping you without any warning or known reason, and insurance carriers going bankrupt.
This is part one of series on DAPTs. My next article will focus on trustee liability and how to best limit this real financial and legal threat for trustees, financial planners, attorneys, C.P.A.s, and, of course, their client.