MISSISSIPPI BECOMES DOMESTIC ASSET PROTECTION TRUST JURISDICTION (And Beats Louisiana In The Trust Business Game)

“MOST PEOPLE WANT SECURITY IN THIS WORLD, NOT LIBERTY.” H.L. Mencken

OLD RIVALS

Mississippi and Louisiana are close competitors on many fronts, such as football, education and diabetes.  However, Mississippi has surged ahead of Louisiana  with the recent enactment of the Mississippi Qualified Disposition in Trust Act” (MS Code Section 91-9-701  et seq ). In so doing, Mississippi has j oined the  ranks of Alaska, Delaware, Nevada, South Dakota and a handful of other states who have enacted legislation permitting domestic asset protection trusts.

This is an interesting dichotomy considering Mississippi is also a hotbed for mass tort litigation returning the largest asbestos verdict in U.S. history in 2011 ($322 Million).

THE GAME

Trusts come in a variety of shapes and forms.  A well drafted trust is tailored to individual circumstances.  A trust may be established for the benefit of the creator (a/k/a the “settlor” or “grantor”) or someone else, such as a child or spouse.

Once created, a trust is usually funded with assets of the creator (settlor or grantor).  If the creator is also the beneficiary, then this is referred to as a “self-settled” trust.

A beneficiary’s interest in a properly drafted trust is  virtually immune from claims of creditors by operation “spendthrift protection” under applicable state law,  which means that the assets of the trust cannot be seized if there is a claim or judgment against the beneficiary, except in very limited circumstances.  However, one huge caveat is that a creditor can seize “a beneficiary’s interests…to the extent that the beneficiary has donated property to the trust….”  La. R.S. 9:2004(2).  In other words, spendthrift protection does not apply to self-settled trusts — at least in Louisiana.  Thus, an individual cannot put their own assets in trust beyond the reach of potential or future creditors in Louisiana.

Enter the age of “domestic asset protection trusts.”  Certain states, such as  Delaware, Alaska, Nevada and South Dakota — and now Mississippi – have all done away with this caveat and now allow the settlor of a trust to transfer their own assets into a trust for their own benefit and obtain the benefits of spendthrift protection.

Spendthrift protection does not apply to a self-settled domestic asset protection trust (“DAPT”) until after a “seasoning” period (generally 2 to 4 years depending on the jurisdiction), which commences on the date of creation the trust. This precludes a settlor from establishing a DAPT after  a problem has arisen, which would constitute a fraudulent transfer. In car talk, state law protects those who utilize preventative maintenance, but not those who seek protection after the car has been wrecked.

THE RULES

Asset protection should be viewed as an integrated component of business and estate planning.  It is not about evading taxes or creditors. It is not based on secrecy or hiding assets.  It is not a means to defraud creditors.

That being said, Louisiana should be ranked among the worst in terms of asset protection.  Very few assets are exempt from seizure in Louisiana in the event a claim is reduced to a judgment.

The following are among the assets exempt from seizure in Louisiana:

• $25,000 of equity in a residence (O.J. chose to buy real estate in Florida for a reason; a personal residence can be seized to satisfy a claim in Louisiana)
• Dogs, cats and household pets (a golden haired Tibetan mastiff puppy reportedly sold for $2M in China, which could be a wise purchase under the right circumstances in Louisiana);
• Tools of the trade (e.g., one utility trailer, one $500.00 firearm, books and musical instruments);

• Clothing, bedding and linen;
  

• $7,500 equity in one vehicle;
• 75% of “disposable earnings”; and
• A wedding ring up to $5,000 in value (which may need to be hocked if a judgment creditor makes it this far down the list).

One bright spot in terms of Louisiana exemptions includes pension plans and tax deferred arrangements.  As such, IRAs, pension plans, annuity contracts and life insurance proceeds are exempt from claims of creditors in Louisiana, provided, however, such a tax deferred arrangement is not created within one year of the date of issuance of a writ of seizure.   All other non-excluded assets are open season in Louisiana and available to satisfy any claims.

The policy underlying state law that protects retirement plan assets from seizure is to ensure no person is rendered destitute, which could result in a burden on the state social welfare system.  There are two problems with this policy: (1) not everyone chooses to utilize a qualified retirement plan as a savings vehicle; and (2) for those that do, the contribution limits (e.g, $5,500.00 annually for IRAs) precludes the ability to accumulate much wealth in real terms.  The goal of DAPTs is to simply put non-qualified retirement/investment accounts on par with qualified retirement accounts in terms of asset protection, which best serves those who can least afford to come out of pocket for an excess judgment — the middle class.

It is important to note that the entirety of community property is available to satisfy claims against either spouse in Louisiana, which can be catastrophic to a non-debtor spouse.  For example, if one spouse causes an automobile accident resulting in a judgment in excess of available insurance, all separate property of the judgment debtor spouse, as well as all community property (including the other spouse’s interest in the community) is available to satisfy the claim.  This can be hugely problematic for a non-debtor spouse.

Keep in mind that full spendthrift protection is fully available in Louisiana for a beneficiary’s interest in a trust established by someone other than the beneficiary (a/k/a “third party trusts”).  For example, if a parent establishes a trust for the benefit of a child, the assets of the trust cannot be seized to satisfy claims against the child, except in very limited circumstances (e.g., to satisfy child support obligations).

WINNERS AND LOSERS

Click here for an actual rankings of the thirteen (13) states that now allow DAPTs. Nevada ranks first and Mississippi is dead last, but at least they made the list.

Residents of Louisiana would do well to consider the availability of non-Louisiana DAPTs for their personal assets and, otherwise, structuring existing Louisiana sitused estate and business plans to maximize protections available for legacies to family members.  Louisiana affords ample protection to third-party trusts, but not much for self-settled trusts or to anyone that possesses more than a $7,500 car, a dog and some bed linens.

Theus Law Offices provides a complete range of estate and business planning services with integrated asset protection techniques, including domestic asset protection trusts (a/k/a domestic asset preservation trusts). If you are facing an estate planning, business planning or asset protection issue and need help from a Louisiana asset protection lawyer in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe or elsewhere, let our estate planning, business planning and asset protection attorneys help you and your business.

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