Quick Summary

Utah’s Domestic Asset Protection Trust statute allows you to shield assets from future creditors while receiving benefits and gain immediate protection from post-transfer creditors. However, federal bankruptcy law can override these protections. This article weighs the strengths and liabilities of Utah trusts.

Why Asset Protection Is a Concern

Traditional trust law prohibited the creation of an asset protection trust with the settlor as beneficiary, a principle known as the ‘self-settled spendthrift trust rule.’ Essentially, if you wanted creditor protection, you had to give up all control and benefits.

Utah changed this system in 2013 by joining a growing number of states that allow domestic asset protection trusts. 

Still, the legal reality remains complicated as federal bankruptcy law operates independent of state trust protections. In this article, we’ll explore the workings of Utah’s Domestic Asset Protection Trusts and where federal law creates vulnerabilities.

Why Listen to Us

At Blake Harris Law, we specialize in asset protection structures across various jurisdictions, with a focus on the Cook Islands trusts and several other domestic trusts. We provide objective evaluations of domestic and offshore options, based on legal mechanisms rather than marketing bias.

The team provides trust formation services in jurisdictions with strong asset protection laws to help clients assess their risk profiles and protection goals.

What is a Utah Asset Protection Trust?

Utah Domestic Asset Protection Trust, according to Utah Code Title 75B, allows you to transfer assets into an irrevocable trust with beneficial interest and protection against creditors, thereby reversing the common law rule against self-settled spendthrift trusts.

Utah Code Section 75B-1-302(1) states that creditors “may not satisfy a claim from the settlor’s transfer to the trust or the settlor’s beneficial interest.” That is, a Utah surgeon may transfer $5 million to a UDAPT, be a discretionary beneficiary, and yet protect assets against malpractice claims while receiving distributions.

Essential statutory requirements include:

  • Utah trustee residency requirements, 
  • Spendthrift provisions against both voluntary/involuntary conveyances
  • Discretionary (rather than mandatory) allocations
  • Amendment prohibitions that subject qualified beneficiaries to required consent

However, the level of protection a UDAPT offers depends heavily on its structure. While the settlor can remain a discretionary beneficiary, stronger protection generally comes when the settlor completely gives up benefits and control.

Legal Framework Governing UAPTs

Utah Laws

Utah Code Title 75B, Chapter 1, Part 3 covers domestic asset protection trusts. Section 75B-1-302 covers the main creditor protection rules, and Section 75B-1-309 covers jurisdiction.

Statutes

  • Burden of Proof: Creditors must prove, with “clear and convincing evidence,” that a transfer was made to defraud them or that the trust does not meet the legal requirements.
  • Utah Connection: At least one trustee must be a Utah resident or a Utah-authorized trust company.
  • Spendthrift Provisions: The trust must block both voluntary and involuntary transfers of beneficiary interests to satisfy creditor claims 
  • Discretionary Distributions: Settlors can’t have guaranteed or mandatory distributions.

Statute of Limitations

  • Pre-Existing Creditors: 2 years from the transfer date (Utah Code Section 75B-1-302(6)).
  • Shortened Option: Can be reduced to 120 days if the settlor notifies pre-existing creditors in writing.
  • Future Creditors: New creditors cannot pursue assets that have been transferred.

Exceptions

Utah Code Section 75B-1-309 says “courts of this state have exclusive jurisdiction over an action or proceeding involving an asset protection trust.” However, federal courts still have jurisdiction over federal matters, including bankruptcy, so that conflicts can arise between federal and state law.

Strengths of Utah Asset Protection Trusts

Immediate Creditor Protection

In contrast to Delaware’s DAPT Act, which mandates specific waiting periods, Utah provides automatic protection against post-transfer claims. Upon transferring property to a qualified trust in accordance with the legal provisions, the property is immediately protected against subsequent creditors.

This upfront protection proved valuable in a 2023 Utah case involving a property developer. Just three months after setting up a UDAPT, a building accident resulted in a $4.8 million verdict. Because the issue happened after the transfer, the trust successfully protected the assets that had already been placed inside it.

Retained Settlor Control

Utah Code Section 75B-1-302(7) permits a degree of participation while retaining protection. A settlor may reserve the following powers:

  • Act as co-trustee
  • Serve as an investment advisor with authority over investment decisions 
  • Maintain the right to block distributions to other beneficiaries
  • Appoint trust protectors with the power to remove or replace trustees

These retained powers distinguish Utah from jurisdictions like Delaware, where extensive involvement can compromise creditor protection.

Flexible Asset Classes and Tax Efficiency

Your trust can hold almost any type of asset. For real estate, Utah property can be transferred directly into the trust. Meanwhile, property located in other states is usually placed into an out-of-state holding LLC owned by the trust, ensuring that Utah law still applies.

Utah only taxes trust income that originates from Utah—such as rent from a house located there or money from a Utah-based business. Income a trust earns outside the state usually isn’t taxed. 

This can mean savings compared to high-tax states like California (13.3%) or New York (10.9%). However, the specific benefits depend on the trust structure, income sources, and beneficiary residency status.

Weaknesses and Limitations of Utah DAPTs

Federal Bankruptcy Override

Under 11 U.S.C. § 548(e)(1), a bankruptcy trustee can undo transfers made to your self-settled trust if they occurred within 10 years before you filed for bankruptcy. To do so, the trustee must prove that you made the transfer with the intent to hinder, delay, or defraud creditors.

When successfully invoked, this federal avoidance power can override state DAPT protections, so trusts created shortly before declaring bankruptcy remain at risk. 

In Battley v. Mortensen (2011), an Alaska DAPT that had been funded four years before bankruptcy was unwound under Section 548(e). Despite Alaska’s strong asset protection laws, the federal court ordered the return of the trust assets. 

We’ve found that this is often the verdict with bankruptcy cases involving asset transfers to self-settled trusts. It is a key weakness of all domestic asset protection trusts under federal bankruptcy law.

Out-of-State Enforceable

Utah professes exclusive jurisdiction over Utah Domestic Asset Protection Trusts; however, courts in non-DAPT states may decide to apply their own laws when a case is heard there. Under choice-of-law principles, a court may determine that the settlor’s home state laws govern creditor rights, defeating DAPT protections. 

For example, if a creditor in California makes a claim over your Utah trust asset, they can argue that California law governs, especially if:

  • Your home base was in California
  • You conduct business in California
  • Assets that you hold in trust include California assets

California courts have long been skeptical of out-of-state asset protection trusts because they conflict with California’s firm policy of favoring creditors’ rights.

Pre-existing Creditor Rights and Professional Responsibility

The two-year rule of limitation is beneficial only against recognised creditors. Professional liability gives you some special planning problems:

  • Tail Coverage Issues: Malpractice claims can arise long down the road. You, as a surgeon supporting a UDAPT, may be sued for surgeries that you performed before you funded the trust. 
  • Regulatory Claims: Professional liability gives you specific special planning problems: Tail Coverage Issues: Malpractice claims can arise long down the road. You, as a surgeon supporting a UDAPT, may be sued for surgeries that you performed before you funded the trust.
  • State licensing boards and professional regulatory bodies usually are privileged under asset protection acts. Utah’s exception to the domestic support obligation covers specific professional regulatory claims.
  • Insurance Coordination: Professional liability insurance policies usually contain” hammer clause” provisions whereby insurers may settle coverage claims regardless of your objection. This may become an obstacle in your UDAPT protection plans whenever insurers favor settlement over litigation.

Settlor-as-Beneficiary Risk

Utah law allows the settlor to remain a discretionary beneficiary, but courts are more likely to uphold a trust’s protections when the settlor has fully given up beneficial interest.

Keeping the settlor and beneficiary roles separate distinguishes between ownership and control, making it harder for creditors or bankruptcy courts to argue that the trust is self-serving. So, the less personal benefit you retain, the stronger your trust’s protection is likely to be.

What Can You Put in a Utah DAPT?

Utah Code Section 75B-1-301 grants an expansive meaning to “property,” including real and personal property of all types; however, practical considerations will ultimately determine your transfer selection.

Properties Held

  • Utah Real Property: Transfers automatically into your trust with a simple re-titling. Mortgages can come with due-on-sale clauses, which require lender approval.
  • Out-of-State Property: A Direct transfer will subject your property to the situs state law. It is recommended that you establish a single-member LLC in the state where your property is situated and then transfer the LLC membership interest to your trust in Utah.

If your Utah DAPT holds Colorado property inside a Colorado LLC, you establish Utah law as governing the beneficial interest, and the property beneath it is subject to the laws of Colorado, providing creditor protection for your ownership while maintaining a clear title.

Business Interests and Investment Accounts

  • Operating Businesses: You can transfer operational business enterprises, but account for the complexities of operating them. With a medical practice, accounts receivable and equipment may transfer to the trust, but you can continue the practice as trustee or through a management agreement.
  • Investment Portfolios: If you hold real estate or have securities accounts, your transfer of assets to a DAPT should be smooth. With that being said, some financial companies might be a bit thorough when it comes to paperwork. Major companies, such as Fidelity or Schwab, have specialized trust departments familiar with DAPT. 
  • Cryptocurrency Assets: Digital assets are one-of-a-kind. Your trust must specify how private keys are administered and maintained, including trustee succession and asset access.

Retirement Account Limitations

You can’t just pick up your IRA and drop it into a trust while you’re alive — doing that would count as a withdrawal and trigger taxes (and maybe penalties if you’re under 59½).

Workplace retirement plans, such as 401(k)s, are strongly protected from creditors under federal law. However, IRAs don’t have the same blanket protections — the rules depend on bankruptcy law and your state’s laws.

Alternatives to Utah Asset Protection Trusts

Offshore structures offer even better protection to settlors who want to retain beneficial interests. If you’re a high-risk individual, you should consider them.

Offshore Asset Protection Trusts 

Offshore asset protection trusts provide a legal means of protecting assets from lawsuits by placing them in overseas trusts managed by foreign trustees. Even if a US court rules in favor of a creditor, the trust management is outside the jurisdiction of US courts. 

The most reputable offshore trust jurisdictions are the Cook Islands, Nevis, and Belize, which have laws and court systems specifically designed for asset protection. 

To better understand how offshore structures safeguard wealth, let’s explore three key areas:

1. Cook Island Trust

Cook Islands trusts have a legal framework that protects against creditor claims, including foreign court judgments. The jurisdiction has robust safeguards in place, ensuring that assets in Cook Islands trusts are protected worldwide. 

If a US court orders the surrender of assets, a Cook Islands trustee has legal protection to resist such demands and safeguard the assets. The Cook Islands also has a statute of limitations on creditor claims and is a defendant-friendly jurisdiction.

Want to learn more? Check out our breakdown of what a Cook Islands trust costs to set up and manage.

2. Cook Island LLC

A limited liability company (LLC) is a business structure that offers the legal protections of a corporation and the flexibility of a partnership. 

Cook Islands LLCs offer better asset protection and privacy than US domestic structures due to the favourable Cook Islands laws. The benefits include:

  • Unlimited members
  • Minimal upkeep costs
  • Can hold assets in the Cook Islands and overseas
  • Strong asset protection
  • Discretion and confidentiality

3. Crypto Asset Protection

Crypto asset protection covers digital assets, particularly cryptocurrency, as they are not exempt from legal action. Even if you hold your wealth in cryptocurrency, courts can demand disclosure of all cryptocurrency holdings. 

If you fail to comply, the court may impose contempt charges, which could result in severe consequences, including imprisonment. 

Fortunately, offshore trusts and limited liability entities can provide a shield for cryptocurrency, just as they do for traditional assets. 

Partner with Experienced Asset Protection Counsel

At Blake Harris Law, we are asset protection planning attorneys who exclusively practice wealth preservation. We develop specialized protection plans for your assets, as mandated by law, including utilizing the best offshore trust jurisdictions.

Our specialized services include:

  • Offshore Trusts: We aid the formation of offshore trusts in Nevis, Belize, and the Cook Islands. These jurisdictions have robust laws that offer adequate privacy and asset protection against creditors. 
  • Limited Liability Companies (LLCs): We offer LLC creation in jurisdictions that have superior legal protection for your desired asset classes.

With extensive consultation, we guide you through each phase of implementation to ensure minimal risk. We strive to provide the best protection tailored to your specific wealth preservation needs.

Don’t leave your wealth exposed to unnecessary risks. Contact Blake Harris Law today to explore your asset protection options.