The Physician’s Hybrid Domestic Asset Protection Trust

Background

It is imperative that every physician have an asset protection structure.  There is perhaps no profession that has to deal with as many lawsuits as do physicians.  While many of the lawsuits are justified, many others are frivolous.  No matter how skilled the physician, errors will be made and lawsuits for malpractice will be a reality.  Because of this reality, physicians should consider a Hybrid Domestic Asset Protection Trust which is a special twist on the more standard Domestic Asset Protection Trust (“DAPT”) that has become so popular.

A traditional DAPT is an irrevocable trust set up under the laws of one of the 15 states that allows such a trust.  The person setting up and funding the trust (the “settlor”) does not need to reside in one of those 15 jurisdictions.  Under the statutes of each of those jurisdictions, after a certain waiting period, the assets transferred to the trust by the settlor should be protected from the settlor’s creditors.

After approximately 17 years since the first DAPT legislation passed, no non-bankruptcy creditor has challenged a DAPT all the way through the court system and been able to access any DAPT assets.  Most likely this is because such a large majority believes that if tested the DAPT will work to protect its assets from a creditor of the settlor.  However, despite the very high likelihood of protection, if there is a way to increase the odds of success even more, then such a strategy should be utilized whenever possible.

The Hybrid Domestic Asset Protection Trust

The Hybrid Domestic Asset Protection Trust (“Hybrid DAPT”) is a strategy that substantially increases the probability that the trust assets will be protected.  And it is very simple.  The Hybrid DAPT is just like a regular DAPT except that the settlor isn’t an initial discretionary beneficiary of the trust, but can be added later.  Thus, the trust is initially set up for the benefit of the settlor’s spouse and descendants, for example, but not for the settlor.  By not including the settlor as a beneficiary of the trust, the Hybrid DAPT is by definition a third-party trust and therefore almost certainly avoids the potential risk of uncertainty and scrutiny of a regular DAPT.  

Especially where the settlor is married and has a strong, trusting relationship with his or her spouse, is there any good reason that the settlor must have his or her name in the trust agreement as a beneficiary?  It is very simple to indirectly access the trust assets through the spouse.  And the trust agreement should define the settlor’s “spouse” using a “floating spouse provision” that says that the spouse is the person the settlor is married to from time to time.  This gives the settlor the ability to access the trust assets through a subsequent spouse in the event of a divorce or the death of the settlor’s current spouse.

If the settlor has no spouse, then it becomes more difficult for the settlor to access the assets without being a beneficiary.  However, since a good asset protection planner will be sure to leave sufficient wealth outside of the client’s asset protection trust, in most cases the settlor won’t have to work through this issue anytime soon.  And just leaving the “option” to get married should the settlor need indirect access to the trust assets is prudent even for the currently unmarried settlor since this option may be the prudent move in the future..

If the Settlor is added as a Beneficiary

In case the settlor needs to be a discretionary beneficiary of the Hybrid DAPT sometime in the future (i.e., if the settlor has no spouse or child that will “share” a distribution with the settlor and the settlor now needs a distribution), the trust agreement provides that the trust protector can add additional beneficiaries, including the settlor.  However, if the settlor is added, then the Hybrid DAPT becomes a regular DAPT and thus risks that the law is still unsettled on DAPTs (even though the substantial majority of people believe that they work).

What happens if the settlor suspects that a creditor attack may be forthcoming?  Or what if the settlor is considering filing bankruptcy?  In either case, very far in advance of the problem occurring, the trust protector should remove him or her as a discretionary beneficiary.  

Down and Dirty

If the settlor has set up a Hybrid DAPT and wants to be sure to preserve a portion of the Hybrid DAPT’s assets if the settlor is being added in as a discretionary beneficiary, the trustee can split the Hybrid DAPT into two separate trusts and the trust protector can add the settlor as a discretionary beneficiary of only one of the two trusts so as not to taint the other trust.

For example, if there are $3 million of assets in the Hybrid DAPT, the trustee might divide the trust into two trusts – the “Clean Hybrid DAPT” which doesn’t include the settlor as a discretionary beneficiary and has $2 million of assets, and the “Dirty Hybrid DAPT” which includes the settlor as a discretionary beneficiary and has $1 million of assets.  Thus, the risk has been transferred away from the Clean Hybrid DAPT to the Dirty Hybrid DAPT (which, again, should be protected, but is potentially being sacrificed in the interests of not tainting the assets in the Clean Hybrid DAPT).  This is nothing more than a risk management decision.

Nevada the leading DAPT Jurisdiction

Nevada is generally considered the leading DAPT jurisdiction since it has only a two-year waiting period for the assets to be protected and because it is the only jurisdiction other than Utah (but Utah has a 5% state income tax and therefore is generally avoided) to not have any exception creditors.  Exception creditors are classes of creditors who can access the trust despite the protection against other classes of creditors.   

The Annual State Rankings Chart at http://www.oshins.com/images/DAPT_Rankings.pdf shows the material differences among the DAPT jurisdictions.  

Summary

It is imperative that the asset protection planner create a plan with the highest probability of success.  This is especially true with respect to physician clients since physicians have a higher propensity for being sued than most non-physicians.  In most cases, it is possible to significantly increase the protection by simply using a Hybrid DAPT rather than a traditional DAPT.  This article describes this structure and also creates a further structure where the Hybrid DAPT can be divided into a Clean Hybrid DAPT and a Dirty Hybrid DAPT so that even if the Dirty Hybrid DAPT is unsuccessful, it doesn’t taint the Clean Hybrid DAPT.  

About the Author:

Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®.  He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada.  He can be contacted by phone at 702-341-6000, ext. 2, by email at soshins@oshins.com or through his law firm’s website at www.oshins.com.   

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