Declaratory Judgments Unlikely to Protect DAPT from Creditors

A Domestic Asset Protection Trust (DAPT) allows a debtor toprotect his assets from creditors. However, these self-settled irrevocable spendthrift trusts are onlyallowed in a few states.  Because thedebtor’s residence typically decides the applicable state law, debtors livingin non-DAPT states probably will not gain DAPT protection, unless the debtormoves to a DAPT state before the creditor enforces a judgment. 

One theory beginning to gain acceptance is that a trustee ina DAPT state can try to obtain a declaratory judgment in the DAPT state beforea creditor can execute on property in a non-DAPT state.  The non-DAPT state court would then be forcedto honor the judgment under the Full Faith and Credit Clause.

This theory fails because courts in the DAPT state must havepersonal jurisdiction over the creditor to enter a declaratory judgment againstthe creditor.  Even if the court findsthat the creditor has engaged in significant action in the DAPT state andpersonal jurisdiction does exist, the creditor could still remove the action tofederal court and invoke the Federal Anti-Injunction Act, 28 U.S.C. § 2283.  Therefore, it is not likely that a DAPT will effectively protect real estate in a non-DAPT state fromcreditors.

See Jay Adkisson, Will Declaratory Judgment Actions Be theSavior of Domestic Asset Protection Trusts? Probably Not., Forbes, Apr. 27, 2013.