Domestic Asset Protection Trusts Part 2 -The Trustee

In my previous newsletter, part one of a series on domestic asset protection trusts, I discussed a brief history of trusts and their uses. Today my focus will be on the trustee.

When advisors plan for their clientele’s asset protection the question always arises over the issue of who will be the Trustee. At first blush, this question seems little more than a formality. At second blush this is no longer a question but a true concern for anyone or entity taking on the role of Trustee.

This “second blush” usually only arises once the advisor has been involved with some part or all of past legal litigation. Generally, advocates for clientele embracing a domestic asset protection trust have, fortunately, not acted as the Trustee in which litigation arose. Many times the newly appointed Trustee will not even have a provision for compensation or indemnification should litigation arise. In this article, I am only focusing on domestic asset protection trusts and the consequences to the acting Trustee. As the news media of several states have informed the public on the benefits of a domestic asset protection trust and the trusted advisors promote such trusts, little discussion is brought into the advisor/client discussions except to hear the rhetoric that domestic asset protection trusts, DAPT, are safe and your assets never leave the shores of the United States or even your state of residency.

In the operation of a trust that has as one of its purposes the protection of client assets, the risk is ever present in the Trustee being sued. Generally, when a creditor is seeking to determine whom to sue over assets within a trust, the Trustee becomes the main target with the best potential for creditors to obtain some financial relief. Some advisors suggest that trusts are not held to any legal status and therefore can not be sued. With this argument, the creditors will then seek the next easiest potential defendant, the Trustee. The creditors will entertain the claim that the Trustee be sued in the Trustee’s personal capacity. If this happens, the Trustee may seek indemnification from the Trust assets, but the trust deed may prohibit this indemnification, and/or the laws of the state will deny relief under indemnification. These trusts act to not only protect the individual who established the trust from creditors but also the Trustee as a potential creditor.

Trusts were a creation of common law as it came down from the courts of equity in Great Britain about 500 years ago when people who created their trusts were able to bifurcate benefits of ownership from ownership obligations. Over these 500 years, trusts never reached the level of law that would allow trusts, themselves, to be sued. The trusts were never actually recognized to be named in a legal lawsuit as opposed to a court of equity.

Currently, in the United States, lawsuits are compelled to go against the defendant Trustee in their/its personal capacity and then force the Trustee to attempt reimbursement of their financial loss from the trust’s assets. Now 48 of the 50 states have sought to bring some equitable relief to the Trustee by adopting and subsequently modifying the Uniform Trust Code or the Uniform Probate Code. This modification acts to bifurcate the entity of the trust from the Trustee which then allows a severing of liability to the Trust as to the Trustee and permits a lawsuit claim to stand for liability of the Trustee not in their/its personal capacity but rather in their/its representative capacity. Note, that the two states that have not adopted this modifying code are Mississippi and West Virginia.

Even in these 48 states, the Trustee is not home-free by any stretch. The Trustee may still be charged as liable in an action in contract law or tort law if the Trustee is held personally culpable or the Trustee did not adequately disclose their/its overt actions in their/its capacity of representation under contract law. In addition, even with this adoption of the Codes, the Trustee is still not out of the legally expensive woods of litigation because the modified Codes merely authorize the litigation claim in a Trustee’s representative capacity and the litigant is not barred from proceeding against the Trustee in their/its personal capacity. Recently, there is a marked judicial trend to allow the trust to actually be sued as a legally recognized party. However, even with this recent trend appearing in our courtrooms, plaintiffs will be filing suit against whomever they believe is solvent as an act to bring about a settlement with damages for the plaintiff.

At this point, I also acknowledge that the United States Government, specifically the U.S. Treasury, holds trusts as taxpayers with tax forms to file and tax identification numbers assigned to them and bank accounts allowed at financial institutions. However, in federal civil procedure, when a lawsuit is to be heard by the federal courts, as is what generally happens when there the plaintiff and the defendant are from different states, the federal courts will then determine diversity and resort to state law, not federal law. Remember, no state has stretched the long-arm statutes to bring the trusts under the definition of an entity for being a party to a lawsuit.

Knowing of these inherent risks, there are now four states that help the Trustee avoid lawsuits in a personal capacity. Alaska, Delaware, South Dakota, and Utah statutorily protect the trustee by prohibiting lawsuits alleging claims against the Trustee under the issue of personal capacity. Caveat, these four states statutorily limit Trustee liability in acts of tort or contract but still can be sued and held liable for acting or forbearance to act in some personal culpability.

A Trustee is still not free from risk. As a potential co-trustee or a successor trustee, you may not be responsible for the tort or contract of the other co-trustee or a predecessor. However, the plaintiff will seek recovery from all parties it includes in its Claim, and upon discovery and finding you are a co-trustee or successor trustee your name will be added to the long list of “John Does 1-100” and it will subsequently be your burden to seek recovery from the culpable co-trustee, predecessor trustee, successor trustee, or from trust assets that a court determines is warranted and permitted. Knowing that your recovery is not allowed against the trust assets, then your effort will be to find a solvent and culpable trustee and, if you are lucky, malpractice insurance policies that cover this type of reimbursement.


Although these domestic asset protection trusts are heavily promoted by states and advisors, there are serious consequences. Even if there is a lawsuit and you are later found to be not liable or able to seek adequate reimbursement, the nightmare of a lawsuit that takes on its own life of claims, counter-claims, new parties joined, summons, discovery, depositions, interrogatories, and endless court appearances over a period of years can ruin your personal and professional life.

If you have any questions, give us a call or email us so we can discuss your particular situation.


Michael B. Nelson, Esq.