What the Courts Have Said About Domestic Asset Protection Trusts

Domestic asset protection trusts (DAPTs) were created to allow people to transfer assets into an irrevocable trust without giving up every potential benefit from those assets. States such as Alaska, Nevada, and Delaware enacted laws recognizing these trusts, with the expectation that qualifying assets would receive a measure of protection from future creditors.

Whether those protections hold up in court is a different question.

Over the last several decades, courts across the country have examined domestic asset protection trusts and closely related trust structures in bankruptcy proceedings, fraudulent transfer litigation, and creditor disputes. Some of those decisions involve DAPTs directly. Others involve traditional self-settled trusts, spendthrift trusts, and similar arrangements that raise the same underlying legal issue: can someone transfer assets into a trust for their own benefit while keeping those assets beyond the reach of creditors?

The decisions discussed below reveal several recurring principles. Although the facts differ from case to case, courts have repeatedly focused on issues such as which state's law applies, where the assets are located, how much control the settlor retained, and how the trust was funded. Together, these cases provide a useful framework for evaluating what domestic asset protection trusts can and cannot accomplish.

How Domestic Asset Protection Trusts Work

A domestic asset protection trust is a type of self-settled spendthrift trust. The person creating the trust (the settlor) also remains a beneficiary, while the trust contains spendthrift provisions intended to limit a creditor's ability to reach trust assets.

Traditional spendthrift trusts are typically created by one person for someone else's benefit. A DAPT works differently because the person creating the trust also remains a beneficiary. States that recognize DAPTs generally require the trust to be irrevocable, administered by a qualified trustee within that state, and include enforceable spendthrift provisions. The exact requirements vary depending on the jurisdiction.

Those statutes do not create unlimited protection.

Every DAPT jurisdiction preserves exceptions for certain types of claims, including fraudulent transfers and other obligations established by statute. More importantly, DAPT statutes exist alongside a much older body of common law that traditionally prohibited individuals from placing assets into trusts for their own benefit while shielding those same assets from creditors.

That historical backdrop helps explain many of the decisions discussed below. Courts evaluating domestic asset protection trusts rarely look only at the language of the trust agreement or the statute under which it was created. They also consider broader principles of trust law, fraudulent transfer law, conflict-of-laws rules, and the factual circumstances surrounding the transfer itself.

The result is a body of case law that extends well beyond trusts expressly labeled as DAPTs. Decisions involving self-settled trusts, discretionary trusts, bankruptcy estates, and spendthrift provisions frequently address the same legal questions and continue to shape how domestic asset protection trusts are evaluated today.

What the Courts Have Found: Four Recurring Themes

Although the cases discussed below involve different jurisdictions, trust structures, and factual circumstances, they repeatedly return to the same legal questions. Courts are generally less concerned with what a trust is called than with how it operates, where the dispute arises, and what rights the settlor continues to exercise after transferring assets into the trust.

The decisions below illustrate four principles that appear again and again in litigation involving domestic asset protection trusts and other self-settled trust arrangements.

1. The DAPT State's Law Does Not Always Govern Creditor Disputes

A domestic asset protection trust may be created under the laws of Alaska, Nevada, Delaware, or another DAPT jurisdiction. That does not necessarily mean a court in another state must apply that law when a dispute arises.

When a dispute reaches court, the governing law is not always determined by the trust agreement alone. Judges also consider where the parties live, where the assets are located, and which state has the closest relationship to the dispute. If another state has the stronger connection, its law may apply instead.

That issue was central in Waldron v. Huber. Although the trust was governed by Alaska law, the bankruptcy court concluded that Washington had the most significant relationship to the dispute because the settlor, creditors, and assets were all connected to Washington. The court also found that the Alaska trustee played only a nominal role in administering the trust. By applying Washington law instead of Alaska law, the court ultimately unwound the transfers into the trust.

The same principle appeared in Toni 1 Trust v. Wacker, where the Alaska Supreme Court recognized an important limitation on Alaska's own DAPT statute. The court concluded that Alaska could not require courts in other states or federal courts to surrender jurisdiction simply because an Alaska trust was involved. Questions involving fraudulent transfer claims and creditor rights could still be heard elsewhere when another court had proper jurisdiction.

When taken together, these decisions illustrate that selecting favorable trust law is only one part of the analysis. Courts routinely examine where the dispute actually belongs before deciding which state's law governs.

Takeaway: A trust may be governed by the law of a DAPT state, but that alone does not guarantee another state's courts will apply those protections when litigation occurs.

2. Where the Assets Sit Can Be Just as Important as Where the Trust Is Created

A trust agreement can designate the governing law for the trust itself, but it cannot change the physical location of property owned by the trust. That distinction becomes especially important when the trust holds real estate or other assets closely connected to another state.

Real estate follows a different rule than many people expect. A Nevada trust does not convert California real estate into Nevada property. Courts generally apply the law of the state where the property is located, which can become an important issue when creditors pursue real estate held in a DAPT.

That principle was applied in United States v. Huckaby, where a federal court considered California property held by a Nevada trust. Because California law governed the real estate itself, the court concluded that California's rules regarding self-settled spendthrift trusts, not Nevada's, controlled the dispute. The trust's Nevada governing-law provision did not prevent the government's judgment lien from reaching the California property.

A similar result occurred in Kilker v. Stillman, where California courts applied California fraudulent transfer law to California real estate that had been transferred into Nevada trusts. Again, the location of the property played a central role in determining which legal principles applied.

These cases demonstrate that courts frequently distinguish between the administration of a trust and the legal treatment of assets held by that trust. For real estate in particular, the law of the property's location often remains a significant factor regardless of where the trust was established.

Takeaway: Creating a trust in a DAPT jurisdiction does not necessarily extend that state's protections to assets located elsewhere. Courts regularly look to the law of the state where the property is located when resolving creditor disputes.

3. Courts Focus on the Settlor's Rights, Not Just the Trust's Language

One issue appears repeatedly throughout these decisions: how much control did the settlor actually keep? Courts often spend less time discussing the trust's wording than they do examining the rights the settlor retained after creating the trust, including the ability to control or benefit from the assets.

The more control a settlor retains, the more likely a court is to conclude that the trust assets remain available to creditors.

That principle was illustrated in State Street Bank & Trust Co. v. Reiser. There, the court allowed creditors to reach assets held in an inter vivos trust because the settlor had retained broad powers to amend or revoke the trust and direct distributions for his own benefit. Although the legal title had been transferred to the trust, the settlor's continuing authority over the assets remained a significant factor in the court's analysis.

A similar conclusion was reached in Markmueller v. Case, where the Eighth Circuit examined a trust in which the debtor served as trustee and exercised broad practical control over trust property. Rather than focusing exclusively on the trust agreement, the court looked at how the trust actually functioned and concluded that the retained authority supported creditor access to the assets.

The same reasoning appears in De Prins v. Michaeles. There, the court focused on what the trustee could have distributed, not simply what had already been distributed. Because the settlor remained eligible to receive discretionary distributions, creditors were permitted to reach the maximum amount available under the trust.

Looking across these decisions, a consistent pattern emerges. Courts repeatedly examine the practical relationship between the settlor and the trust instead of stopping with the trust agreement itself. Retaining significant rights or access to trust assets has repeatedly influenced the outcome.

Takeaway: Courts regularly examine the settlor's continuing rights and access to trust property when deciding whether creditors may reach trust assets.

4. Courts Examine How the Trust Was Funded

Whether a trust is considered self-settled does not always depend on who signed the trust agreement. Courts have also examined where the trust assets came from and whether they ultimately originated with the settlor, even when they passed through other transactions before reaching the trust.

This issue arises because the legal characterization of a trust often depends on the source of the property placed into it rather than the mechanics of the transfer.

In Herrin v. Jordan, the Ninth Circuit concluded that a structured settlement trust was self-settled because the trust assets were directly traceable to the debtor's own personal injury recovery. Although the funds passed through the settlement process before entering the trust, the court focused on the debtor's legal right to receive those proceeds.

The same reasoning appeared in Lassman v. Tosi, where a bankruptcy court determined that portions of a discretionary trust were self-settled because they were funded with property the debtor was legally entitled to receive, including inheritance proceeds. The path the assets followed into the trust did not change their legal character.

Calhoun v. Rawlins involved assets transferred into a trust as part of a divorce settlement. Because those assets represented legal rights the beneficiary received during the divorce, the court treated the trust as self-settled for purposes of creditor claims.

Although these cases involve different facts, they ask the same basic question: who actually supplied the trust property? Courts frequently trace the assets back to their source instead of focusing only on how they were transferred.

Takeaway: The origin of trust assets can be just as important as the transfer itself. Courts may treat a trust as self-settled when the assets ultimately came from the settlor.

Third-Party Spendthrift Trusts: Even Properly Structured Trusts Have Limits

The cases discussed so far involve self-settled trusts where the person creating the trust also benefits from it. Third-party spendthrift trusts operate differently because they are created and funded by someone other than the beneficiary. Even so, the protections offered by these trusts are not absolute.

Courts have long recognized circumstances in which creditors may reach trust assets despite the presence of a valid spendthrift provision.

For example, California law permits judgment creditors to reach trust distributions that are presently due and payable to a beneficiary, along with a portion of future discretionary distributions in certain situations. The Ninth Circuit applied that principle in Frealy v. Reynolds, holding that these creditor rights continue even when the beneficiary files for bankruptcy.

Neuton v. Danning illustrates another limit on spendthrift protection. The Ninth Circuit concluded that a debtor's contingent interest in a third-party spendthrift trust became part of the bankruptcy estate to the extent permitted under California law. The spendthrift provision remained relevant, but it did not prevent creditors from reaching every interest the beneficiary held.

Support obligations have long been treated differently from ordinary creditor claims. Courts have repeatedly held that spendthrift provisions generally do not prevent the enforcement of child support or spousal support judgments.

That principle appears in both Bacardi v. White and Howard v. Spragins, where the courts permitted trust assets to be used to satisfy family support obligations despite the presence of spendthrift language.

When taken together, these cases demonstrate that spendthrift trusts provide significant protection in many situations, but they have never insulated trust assets from every type of claim recognized under American trust law.

What This Means in Practice

When viewed together, these decisions reveal a consistent pattern.

Courts evaluating domestic asset protection trusts rarely stop with the trust agreement itself. Instead, they examine questions such as which state's law applies, where the assets are located, what rights the settlor retained, how the trust was funded, and whether longstanding creditor-protection principles outweigh the statutory protections offered by a DAPT jurisdiction.

These decisions also explain why litigation involving domestic asset protection trusts often extends beyond the DAPT statute itself. Courts regularly apply established principles of trust law, fraudulent transfer law, and conflict-of-laws analysis when deciding whether trust assets remain protected.

For anyone considering a domestic asset protection trust, the cases discussed here point to the same conclusion: the trust operates within the U.S. legal system. When litigation arises, U.S. courts apply long-established legal principles alongside the statutes authorizing DAPTs, and those principles frequently shape the outcome.

Understanding those limitations is an important step in evaluating whether a domestic or offshore structure is appropriate for your circumstances. Our firm regularly assists clients with Cook Islands trusts and comprehensive offshore asset protection planning. If you would like to discuss your options, contact our office to schedule a confidential consultation.

Blake Harris Law is an exclusively offshore asset protection law firm. This article is prepared for informational purposes only, does not constitute legal advice, and does not create an attorney-client relationship.