DAPTs & Klabacka: At the Intersection of Estate Planning and Family Law
“Should your client’s marital planning include use of a domestic asset protection trust (“DAPT”) to safeguard separate assets in the event of a divorce? Given the uncertainty that can exist with respect to the enforceability of pre-and post-marital agreements, and the potential of a DAPT bolstering of separate property status, DAPTs can be an important facet of marital planning. Even when utilized for non-marital purposes, DAPT’s can have a favorable impact on marital and divorce planning. After the Jobs Cut and Tax Act of 2017 the doubling of transfer tax exemptions will facilitate the transfer of more assets to completed gift DAPTs in matrimonial planning.
The Tax Act will also change the historic treatment of alimony for divorces after 2018. This change could also have an impact on existing prenuptial agreements that may have fixed the amounts of alimony in the event of a later divorce. It is precisely this type of unforeseeable risk that supports the recommendation of this newsletter that prenuptial agreements be backstopped by the creation and funding of a DAPT prior to marriage to lessen the potential problems of such unforeseen risks.
DAPTs have now been adopted in 17 states, with Michigan becoming the newest state to join this trend on March 8, 2017 Nine additional states have recognized some modified or limited version of a self-settle trust as being exempt from creditor claims. These include inter-vivos spousal QTIP trusts whereby a gift is made by one spouse to a QTIP marital trust to benefit the other spouse, followed by a transfer on the death of the beneficiary spouse to a credit shelter type trust formed under the QTIP to benefit the donor spouse, who is deemed not to have contributed to the trust. Some states have enacted statutes that provide an additional measure of asset protection for certain specified trusts or accounts (such as 529 accounts and special needs trusts). This trend might provide support for rebuking public policy arguments historically utilized to evade or otherwise invalidate the exemption of assets governed by DAPTs from the claims of creditors. This may be of particular importance in divorces where a DAPT is created in a state which doesn’t recognize spousal and child support obligations as exceptions to DAPT creditor protections.”
Click this link to read Sandra, Martin and Alan’s commentary.
No related posts.