Wyoming Domestic Asset Protection Trusts

1. Wyoming Domestic Asset Protection Trusts Scottsdale, AZ October 2010 Cecil Smith & Carol Gonnella

2. The 12 States That Have Enacted DAPT Legislation 1. Alaska 2. Colorado 3. Delaware 4. Missouri 5. Nevada 6. New Hampshire 7. Oklahoma 8. Rhode Island 9. South Dakota 10. Tennessee 11. Utah 12. Wyoming

3. Requirements of a WY DAPT The Trust Must: • Have a “Qualified” Trustee 2.Be funded with “Qualified” Property (Only Qualified Property is Protected) 3. Be Irrevocable • Specifically state it is a “QualifiedSpendthrift Trust” • State that the law of Wyoming governs the validity, construction and administration of the trust.

4. However, even though the trust is Irrevocable, the Trustmaker may: 1. Veto a distribution from the trust 2. Have a Testamentary General Power of Appointment 3. Reserve right to Receive Income 4. Reserve right to receive 5% of Principal each year for any reason

5. 5. Receive Additional Principal in Trustee’s discretion, or based on HEMS standard 6. Reserve right to Add or Remove a Trustee, Trust Protector or Trust Advisor, and 7. Appoint a New Trustee, Trust Protector or Trust Advisor, other than the Trustmaker. 8. Reserve right to serve as an Investment Advisor to the trust.

6. Bankruptcy If a grantor’s interest in a Wyoming DAPT is subject to a “restriction on transfer” (which it will be), that is enforceable under state law, then such property restriction is enforceable under bankruptcy law. The Bankruptcy Court may void any transfer made to a self-settled trust if made within 10 years before the filing of the petition.

7. The Investment Advisor (Who May be the Trustmaker) 1. May approve or veto a Trustee’s action or inaction relating to investments of trust assets. 2. May direct the acquisition/purchase, transfer or retention of any investment; and • May consent to, or veto the trustee‘s action or inaction in making distributions to beneficiaries.

8. What is a “Qualified” Trustee?(Can NOT be the Trustmaker) • An individual who is a resident of Wyoming, or • A “person” * authorized by Wyoming law to serve as a trustee, or • A regulated bank or trust company with real offices in Wyoming. * Under Wyoming law a “person” can be an LLC. PRIVATE TRUST COMPANY.

9. Who is NOT a “Qualified” Trustee? Trustmaker, Non-Resident Individual, An entity not authorized by the law of Wyoming to act as a trustee, or 4. An entity that is not a regulated financial institution. vHowever, a DAPT may have non-qualified Trustees … just one needs to be “Qualified.”

10. The Qualified Trustee Must: 1. Maintain (or arrange for custody) in WY some of the qualified trust property; 2. Maintain records for the DAPT on an exclusive or non-exclusive basis; 3. Prepare (or arrange for) the preparation of income tax returns for the DAPT; or 4. Otherwise materially participate in the administration of the DAPT.

11. What is Qualified Property? 1. Real property, 2. Personal property, 3. Gains, 4. Appreciation, and 5. Income thereon. NOT IRAs, for example.

12. The Trustmaker’s Affidavit The Trustmaker must execute an Affidavit at funding stating that: • He has authority to transfer the property to the DAPT; • The transfer will not render him insolvent; • He does not intend to defraud any creditors;

13. The Affidavit … Continued • 4. He does not have any pending or threatened court actions against him, except as identified in the affidavit; • 5. He is not in default of a child support obligation by more than 30 days; • 6. He does not contemplate filing for bankruptcy; and that • 7. He has and shall maintain personal liability insurance of $1,000,000, or such amount that is equal to the FMV of the assets he transferred to the trust, whichever is less.

14. The Following Property is NotProtected by a Wyoming DAPT: • Child Support*, subject to certain limitations. • Assets Listed on Application for Credit. • Fraudulent Transfers. * With purely discretionary trusts, even this this Child Support Exception may be difficult to enforce. Query: Are these restrictions reasonable?

15. Wyoming’s Fraudulent Transfer Act A transfer is fraudulent if the debtor made the transfer with the actual intent to hinder, delay or defraud creditors.

16. Fraudulent Transfer ActsStatute of Limitations Nevada has the shortest SOL regarding fraudulent transfers. Thus, a Creditor who was defrauded in the other states must bring action within 4 years of the transfer to the DAPT, or within 1 year of the discovery of the DAPT.

17. FRAUD!•FRAUD!•FRAUD! Keep in mind that Wyoming’s SOL only appliesif you are dealing with a fraudulent transfer. If the transfer is not fraudulent, the client has nothing to worry about. Creditor must prove that there was actual intent to hinder, delay or defraud the claim of that particular creditor.

18. Arguments to Counter a Fraudulent Transfer Attack Client is solvent after the transfer. Client has not maintained total dominion and control over the assets transferred. Client acknowledges any Known or Reasonably Anticipated Claims. Client has adequate liability insurance.

19. Jurisdictional Issues • Will an out-of-state court apply Wyoming law relating to the DAPT? • This is a gray area in any state. • Not much case law, because these issues aren’t litigated very much.

20. Wyoming Protects Fiduciaries & Attorneys No creditor has any cause of action against: • Trustees • Trust Protectors • Trust Advisors • Attorneys, or • Any other person involved in the counseling, drafting, administration, preparation, execution or funding of the trust.

21. Cecil & Carol Thank You!