By Randy Hahn
Utahns love their homes and families and invest a large percentage of their assets to purchasing, updating and maintaining their homes — the center of family life. And many plan to pass along their home, savings and other assets to their children. But few Utahns are taking advantage of a Utah law that would protect their homes and assets from being taken away by creditors or litigation, leaving nothing but minimal necessities for the homeowners, dependents and heirs.
Conscientious high-net-worth people have a financial and estate plan in place, which generally includes a living trust, a will, power of attorney and a healthcare directive, in order to carry out the individual’s wishes during their life and after they have passed on. But many Utahns are missing one of the most important financial tools available to protect their assets.
Historically, under common law, individuals could not create a trust for their own benefit while also precluding their personal creditors from collecting personal liabilities from trust assets. Starting in the late 1990s, Delaware, South Dakota and Nevada legislatures changed this rule by allowing the creation of a Domestic Asset Protection Trust (DAPT). Utah followed suit in 2003, with an Asset Protection Trust statute, one of the most comprehensive personal and business asset protection laws available to people who are accumulating wealth and to business owners in Utah.
Utah’s DAPT is a “self-settled trust,” which allows the person establishing the trust (a grantor or settlor) to fund the trust with their personal assets and also permits the grantor to benefit from the trust. A well-structured DAPT will protect those trust assets from future claims from the grantor’s creditors. The premise of the law is not to absolve a person from their financial obligations, but rather protect them in this lawsuit-happy world, from losing their home and assets to maintain the lifestyle they created for themself.
Why is a DAPT important to your personal planning? Utahns are diligent in managing their health and medical affairs with health care directives, so, why wouldn’t that person also want to add a DAPT to their estate plan in order to protect their personal and business assets, particularly if they are a doctor, lawyer, accountant, business owner or other professional at risk of lawsuits?
Up until 2003, Utah residents had to use out-of-state DAPTs to take advantage of creditor protection. Now Utahns can work with local professionals to get those same protections. Utah attorneys have written about the advantages of a DAPT but unfortunately there has not yet been wide adoption of this protection in Utah.
The year 2020 reminded Utahns that life can turn upside-down for people in an instant, and more than ever, it’s essential for everyone to get their financial and medical affairs in order. Here’s how to get started with a Utah DAPT:
1. Contact an attorney or a Utah-based bank trust expert for help to set up a Utah Asset Protection Trust. They will explain the intricacies of the law and the bank trustee can serve as the impartial trust administrator.
2. Sign an affidavit of solvency, which notifies any current creditors that the trust grantor has adequate non-trust assets to pay outstanding debts or potential creditor claims. Once a person has funded his or her trust, generally, protection against past creditors goes into effect in two years and is in effect immediately for future creditors.
3. Give notice to creditors of the trust. Giving notice expedites protection from past creditors after 120 days. Note that a Utah DAPT does not provide protection from child or spousal support.
4. Fund the trust. Utah’s DAPT can include real estate, both residences and rentals; one’s small business, financial accounts; such as bank or investment accounts; and personal property such as vehicles, tangible items and other personal assets. IRAs cannot be included, but they are already protected up to $1 million under federal law.
5. A DAPT is an irrevocable trust, but the assets or income may be distributed to benefit the grantor during the grantor’s life, even if incapacitated, and the grantor may retain the power to appoint the beneficiaries of the trust upon the grantor’s death.
Make sure the trustee is local. This is critically important, as often a Utahn’s biggest asset is his or her home, and to protect property located in Utah, including real estate or a small business, Utah law requires the trustee to be a Utah resident or trust business.
Randy Hahn is a personal trust manager at Bank of Utah and manages the bank’s personal trust department at its City Creek Banking Center in Salt Lake City. He is also a licensed attorney and is a Certified Trust and Financial Advisor (CTFA).