ASSET PROTECTION ISSUE:
Will an Alaska Domestic Asset Protection Trust (DAPT) stand up to a Bankruptcy Trustee?
Donald G. Huber (Huber) and his son Kevin Huber owned United Western Developers (UWD), a real estate investment and development company in the Pacific Northwest doing business since 1968. In 2007 the real estate market was crashing and the handwriting was on the wall that Huber would be unable to meet his large debt obligation, many of which he had personally guaranteed.
So in 2008 Huber utilized the services of an estate planning attorney in Seattle to settle an Alaska Domestic Asset Protection Trust (DAPT). He then proceeded to contribute all of his healthy real estate assets and $3 million in accounts receivable into it, while leaving the sinking assets outside. His son Kevin, along with the Alaska USA Trust Company served as Trustees.
He then stiffed the creditors and attempted to use Chapter 11 Bankruptcy to reorganize his affairs in February of 2011, hoping to exclude the Trust assets from the bankruptcy estate. This was later turned into a full Chapter 7 liquidation by the end of 2011.
This issue before the Bankruptcy court was the inclubility of the Trust assets in the bankruptcy estate.
The bankruptcy court had several issues with the Trust.
- It was noted that the Trust was created, and assets transferred, when the ‘handwriting was on the wall,’ leaving the entire transfer open to the issue of fraudulent conveyance.
- The Bankruptcy court in WA had an issue with applying Alaska law and argued that the Alaska USA Trust company really did virtually nothing and there was only a $10K CD held in Alaska, while the bulk of the assets remained in Washington State.
- Finally, and the real killer for Mr. Huber, was Section 548(e) of the bankruptcy code which states that a transfer made within 10 years may be voided if the transfer was made to a self-settled spendthrift trust with the actual intent to delay, hinder or defraud a creditor.
The court ultimately applied Washington law, as well as found that the transfer did violate section 548(e). The Alaska USA Trust company rolled right over and settled as soon as they could with the Bankruptcy Trustee and the assets were included in the Bankruptcy estate.
So much for the Alaska DAPT.
CITE TO CASE: In Re Huber, 201 B.R. 685 (Bankr. W.D. WA May 17, 2013).
ASSET PROTECTION SUMMARY:
This is a major FAIL for Domestic Asset Protection Trusts. Admittedly, the facts where horrible, and Huber had terrible timing. Nevertheless, its hard to imagine that anyone involved in setting up this plan thought it was going to work. This case really doesn’t merit a detailed analysis. Even if the facts had been much better, or the timing was no so close, the fact remains that a U.S. court can, and now has, find a way around the DAPT laws from another State and reach the assets. This should be enough to tell anyone paying attention that Domestic Asset Protection, left on its own, is prone to failure.
The take away on this case is simple: Do not use Domestic Asset Protection Trusts if you are serious about asset protection! I did not say, do not utilize the U.S. as a jurisdiction. That is both advisable and also virtually unavoidable for U.S. clients. The difference is when push comes to shove, you had better have your planning, and your assets, offshore if you expect to win.