For many physicians, the question is not “if” you will be a party to a lawsuit but is instead “when.” Before that time comes, you want to make sure that you have taken the necessary steps to protect your wealth.
Protecting yourself and your assets in South Dakota through a Domestic Asset Protection Trust is a great preemptive way to ensure that your hard-earned assets remain shielded from potential lawsuits.
What is a Domestic Asset Protection Trust?
A Domestic Asset Protection Trust (“DAPT”) is an irrevocable trust that safeguards the assets placed in the trust from potential lawsuits or any other third-party creditors.
In a DAPT, a trustee is appointed to manage the trust and you are named as the beneficiary. The trustee then has discretionary authority to distribute the trust assets to you. However, due to the nature of the DAPT, you as the beneficiary still have a certain amount of control over assets in the trust, this includes: the right to veto a distribution, the receipt of income from the trust, and the right to remove the trustee in certain circumstances.[1] This control does not create third-party liability in the way that a traditional revocable trust would.
Why South Dakota?
Not all states provide the option of a DAPT. Currently, South Dakota is among only 17 states that allow for its creation. Among those states, South Dakota is consistently rated as one of the states with superior trust protection. In 2020, South Dakota was ranked the second-best state in the nation for Domestic Asset Protection Trusts.[2]
South Dakota is a tax-friendly state as there is no state income tax. South Dakota also has strong trust privacy laws. The trust and all court orders relating to it are sealed upon filing and may not be made a part of the public record of the proceeding.[3]
What is required to create a DAPT in South Dakota?
You, as the beneficiary of the trust, do not have to be resident of South Dakota to establish a DAPT and take advantage of its benefits. In addition, the trust property does not have to be located in South Dakota.
To create the DAPT, you must name only one trustee who resides in South Dakota.[4] This leaves with you option to name other co-trustees that are not residents.[5] The language of the DAPT must: (i) expressly incorporate South Dakota law to govern the validity, construction, and administration of the trust; (ii) state that the trust is irrevocable; and (iii) contain a spendthrift clause (state that the interest of the transferor or other beneficiary may not be transferred, assigned, etc., before the qualified person distributes the property to the beneficiary).[6]
What am I protected from?
In the event that a lawsuit is brought against you and a creditor makes a claim for your assets, a South Dakota DAPT provides you protection as long as your property was transferred to the trust two years before the claim arose.[7] This two-year “look back” period for a fraudulent conveyance claim is one of the shortest time periods in the United States.[8] In addition, the creditor has the enhanced burden of proving their case by clear and convincing evidence.[9]
In contrast, if the claim arises before your transfer of assets, the creditor has until two years after the transfer or six months after the creditor discovers the transfer, whichever is longer.[10]
A DAPT will not protect your assets from claims regarding alimony, child support, or property settlement relating to a divorce that existed at the time of the transfer of assets to the trust.[11] However, if married at the time of the transfer and your spouse is notified of the transfer of property into the trust and the spouse does not object, the spouse cannot become a creditor to the trust.[12]
Why should a physician consider a DAPT in South Dakota?
As a physician, you are both high earner and more susceptible to lawsuits than many other careers. According to the American Medical Association, 34% of all physician have been sued with almost 17% of all physicians having been sued more one time.[13] In addition, “on average 68 liability claims were filed per every 100 physicians.”[14]
These numbers stress the importance of taking proactive steps to ensure that your assets are protected before a claim occurs and a South Dakota Domestic Asset Protection Trust is a great start.
[1] SDCL 55-16-2(2).
[2] Steve Oshins’ 11th Annual Domestic Asset Protection Trust State Rankings Chart created in April 2020, https://db78e19b-dca5-49f9-90f6-1acaf5eaa6ba.filesusr.com/ugd/b211fb_0e205011bc5f4e4cb9d6232ee68647ca.pdf
[3] SDCL 21-22-28.
[4] SDCL 55-16-3.
[5] SDCL 55-26-4.
[6] SDCL 55-16-2(1-3).
[7] SDCL 55-16-10(2).
[8] SDCL 55-16-10.
[9] SDCL 55-16-10(3).
[10] SDCL 55-16-10(1).
[11] SDCL 55-16-15
[12] SDCL 55-16- 15(3)
[13] Guardado, Jose, “Policy Research Perspectives: Medical Liability Claim Among U.S. Physicians,” page 3, www.ama-assn.org
[14] Id.
