In May of 2011, a federal bankruptcy case, Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD (2011) led many planners and clients to doubt the protection afforded by Domestic Asset Protection Trusts (DAPTs). Judge MacDonald set aside Thomas Mortensen’s transfer of real property to an Alaska asset protection trust as a fraudulent conveyance. This case came in direct opposition from previous holdings on the same issue, as the Grantor of the trust was not only solvent when he transferred the subject property, but he was also beyond the state statute of limitations for transfers. In Alaska, the statute of limitations is four years but only two years in Nevada. What does this mean for those who have created DAPTs as part of their overall estate planning and asset protection structures?
Following an expensive divorce, Mr. Mortensen drafted an Alaska Asset Protection Trust by himself. The trust was created to hold real property located in Alaska, worth only approximately $60,000 at the time of transfer in addition to a cash gift of approximately $100,000 from his mother. In 2009, more than four years after drafting the document, Mr. Mortensen became ill and subsequently racked up credit card debt. He then filed for Chapter 7 bankruptcy. Though he disclosed his personal assets and the fact that he had a DAPT, he did not disclose the property held by the DAPT.
Even though Alaska has a four-year statute of limitations on transfers to a DAPT, the court applied federal Bankruptcy law which enjoys a ten-year statute of limitations from the date in which a bankruptcy is filed. Thus, the transfer to the DAPT was unwound, and the property transferred to the DAPT was sold to satisfy his creditors.
Practitioners are somewhat split as to this ruling. Some believe that this case may be a death knell to transfers to a DAPT however, this case should be distinguished on its facts. Unfortunately in this case, Mr. Mortensen drafted the DAPT and filed bankruptcy without legal counsel. Had he not filed Chapter 7, Mr. Mortensen would have been protected from the unsecured creditors via the four-year statute of limitations and the ten-year federal rule would not have been applied. Additionally, Mr. Mortensen was not in a good position to form a DAPT in the first place since he had declining income, low net worth and escalating debt.
Rather, I like to view this case as a whole as validating the fact that Asset Protection trusts should not be created to defraud creditors. As such, this type of planning can still prove to be an integral part of one’s overall estate plan.