Will Domestic Asset Protection Trust Work in Florida?

Domestic asset protection trusts (“DAPT”) are the U.S. version of offshore trusts. These trusts are established in states other than Florida which states have enacted legislation protecting debtor’s assets held in a self-settled trust. A self-settled trust is one created by a debtor for his own benefit.The question is whether a Florida resident can protect his assets in a trust established in one of the so-called DAPT states.

I know of no cases in Florida courts dealing with a creditor’s collection of assets owned by in Florida debtor in a domestic asset protection trust formed in another state. For that reason, many Florida debtors and many asset protection advisors see the legal glass as “half full”, i.e, no Florida court has invaded a Florida debtor’s DAPT. There are, however, courts in other states have considered the effectiveness on DAPTs formed outside the debtor’s states. These cases suggests that a DAPT will not work for most Florida debtors. Here’s why.

The legal issue in DAPT planning is a “conflict of law” or “choice of law” issue. Florida law expresses a public policy against debtor’s using a self-settled trust to protect his asset from judgment creditors. If a Florida resident forms a self-settled trust in a DAPT state where these trusts are expressly protected from all creditors, will Florida courts apply the protective laws of the DAPT state which has encouraged self-settled trust protections or the Florida law opposing self-settled trust protection.

Resolution of the conflict between states with different self-settled trust laws is not simple. Courts have applied multi-step analysis which looks at the facts of each debtor and each trust. Most courts which considered conflicts of DAPT law between the trust formation state and the debtor’s resident state referred to standards expressed in the Restatement of Trusts. The Restatement is a collection of trust law policies meant to apply throughout the states.

Some of the applicable trust conflict of laws are as follows. The general rule in the Restatement of Trusts is that courts should give effect in a trust agreement to the laws of the trust formation state, or the choice of state law in the trust agreement, provided this state has a substantial relation to the trust and that the application of its local law does not violate a strong public policy of the state with which as to the matter at issue the trust has its most significant relationship.

A state has a substantial relation to a trust when it is the place of business or domicile of the trustee at the time of the creation of the trust, or that of the location of the trust assets, or that of the domicile of the settlor or the beneficiaries when the trust is created.

On the other hand, if the state where litigation is pending has a greater interest in the issues and the laws of the settlor’s chosen state law (the DAPT state) are contrary to fundamental public policy of the litigation state then the courts should apply laws of the litigation state (Florida) instead of the DAPT state chosen in the trust agreement.

This means that if a Florida debtor establishes a DAPT trust when neither the debtor nor beneficiaries reside in the DAPT state and the trust holds no assets located in the DAPT state a Florida court should not apply the DAPT state law and not permit the DAPT to protects its assets from Florida creditors in Florida collection litigation. Even if the debtor has a trustee doing business or living in the DAPT states and if the DAPT state is the location of some, but not all, of trust assets, a Florida court may still consider whether the DAPT is contrary to Florida’s public policy against self-settled trust and whether Florida has a greater interest in trust property than the DAPT states. If most trust assets are in Florida, the debtor currently resides in Florida, and creditors are in Florida I believe most Florida courts will apply Florida law and will permit creditors to reach assets held in the asset protection trusts.