As a business owner in California, you work hard to grow your company, take on the stiff competition in our state, and secure a financial future. Whether you’re expanding your services, planning for retirement, or ensuring your family’s financial stability, having an effective asset protection plan is critical.
Domestic Asset Protection Trusts (DAPT) are promoted as a way to shield assets from future creditors, but they aren’t recognized in all states. In fact, California does not recognize them. That doesn’t mean California business owners can’t establish DAPTs in states that allow them, however. In doing so, it’s important to understand the limitations and risks associated with doing so. For example, in the case of In re Huber (2013), state law overrode the protections of an out-of-state DAPT, leaving assets vulnerable.
Case Law Offers Cautionary Tales for DAPTs
In re Huber involved a real estate developer from Washington who opted to establish a DAPT in Alaska in 2008 as the real estate market was collapsing. He placed cash into the trust, while the majority of his other assets remained in Washington. His son and an Alaska trust company served as trustees. When the settlor filed for bankruptcy in 2011, however, creditors attempted to access the trust’s assets.
Ultimately, the bankruptcy court in Washington applied Washington law instead of Alaska’s, invalidating the trust’s protection. The court reasoned that a state’s laws will govern so long as they do not violate a strong public policy of another state with the most significant relationship to the trust. Because the settlor, beneficiaries, and most of the assets were in Washington, and Washington had a clear public policy against self-settled asset protection trusts, Washington law prevailed. As a result, the trust failed to protect the assets as intended.
This ruling highlights a key issue: Courts are unlikely to honor a DAPT’s protections if the trust creator, assets, and beneficiaries are primarily located in a state that does not recognize DAPTs. Similar outcomes have occurred in other cases from other states, including Dahl v. Dahl in Utah (no, not us!), where the court refused to apply Nevada law to protect a DAPT established by a Utah resident as it contained marital property from Utah. The pattern is clear—state public policy and the location of assets play a decisive role in whether a DAPT will be upheld.
Asset Protection Planning for California Business Owners
Again, California state laws do not recognize DAPTs, and courts have established a precedent to apply state public policy over another state’s DAPT-friendly laws. Business owners looking to protect their assets need strategies that will hold up in California courts. Finding alternatives (irrevocable trusts, limited liability entities, etc.) designed to reduce exposure to legal risks is an important element of an effective California asset protection plan. To ensure your plan aligns with both your business goals and California law, connect with Dahl Law Group. We can help you choose the best options to protect your wealth and provide long-term security for your business and family.
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