We’re going to discuss the number one reason why domestic and foreign asset protection trusts fail.
Before we get into the details, I want to focus primarily on domestic asset protection trusts (DAPTs) because that is where my experience lies, and I have helped clients establish these types of trusts within the U.S. A domestic asset protection trust is set up under the laws of a specific state within the U.S., while a foreign (or offshore) asset protection trust is established in jurisdictions outside of the United States. However, both types of trusts typically fail for the same fundamental reason.
Why Do Asset Protection Trusts Fail?
The number one reason these trusts fail is due to fraudulent transfer or a violation of the fraudulent conveyance doctrine. This doctrine states that you cannot intentionally defraud a creditor who has a claim against you—or who might have a claim against you in the future.
To prove fraudulent intent, a creditor must provide evidence that the transfer of assets into the trust was done with the purpose of avoiding a legal obligation. It’s important to note that different states have varying laws around what constitutes intent and how it must be proven. However, the burden of proof falls on the creditor—they must provide enough evidence to demonstrate that the transfer was fraudulent.
Fraudulent transfers do not only apply to trusts. A fraudulent conveyance can occur whenever you transfer assets from yourself to someone else, whether it’s to an individual, an LLC, a trust, or through a sale, gift, or assignment. If the transfer is deemed fraudulent, the courts can reverse it, forcing the assets back into your estate and making them available to creditors.
The Statute of Limitations on Fraudulent Transfers
In addition to proving intent, creditors must challenge a transfer within a certain timeframe—this is known as the statute of limitations. The statute of limitations for fraudulent transfers varies widely by state.
As of 2025, there are 20 states that allow domestic asset protection trusts, but only about five states are truly worth considering. However, generally speaking, only two states—Nevada and South Dakota—are the strongest and most reliable jurisdictions for setting up a DAPT. I personally prefer South Dakota, as its trust laws are the most favorable, even though they are nearly identical to those in Nevada.
South Dakota and Nevada have a two-year statute of limitations for challenging a transfer. However, there is a two-prong test:
- A creditor can challenge a transfer within two years of the transfer being made.
- If the creditor had notice of the transfer, they have only six months to file a challenge.
For example, if you notify a potential creditor that you have transferred assets into a trust, they only have six months to act. In contrast, Ohio has an 18-month statute of limitations (the shortest in the U.S.), while other states like Wyoming, Alaska, and Delaware have longer statutes, usually around four to five years.
Other Ways Trusts Could Fail
While fraudulent transfers are the primary reason for failure, there are other potential legal challenges to asset protection trusts. However, many of these have not yet been fully litigated in court. Some of these issues involve constitutional law questions, but since they haven’t been tested in high-profile cases, they remain largely theoretical at this point.
Real-World Example of a Fraudulent Transfer Case
One notable case involved a foreign asset protection trust. A settlor (the person who established the trust) transferred assets into an offshore trust. A judge in Illinois reviewed the case to determine if there had been a fraudulent conveyance. The judge ruled that the intent to defraud was present and that the transfer had occurred within the statute of limitations, making it legally invalid.
As a result, the judge ordered the settlor to unwind the transfer and bring the assets back under U.S. jurisdiction. However, the settlor refused to comply. In response, the judge held the settlor in contempt of court and sent them to jail until they agreed to reverse the transfer. This case highlights that fraudulent transfers are not criminal offenses but civil violations, meaning courts can impose serious consequences, including jail time for contempt.
Key Takeaways
- Intent matters – A creditor must prove that you intended to defraud them when transferring assets.
- Timing is crucial – If the transfer occurred outside the statute of limitations, it is generally safe from challenge.
- State laws vary – South Dakota and Nevada offer the strongest protections, while Ohio has the shortest statute of limitations.
- Fraudulent transfers can be undone – If a court determines your transfer was fraudulent, it can force the assets back into your estate.
- Consequences can be severe – In extreme cases, a judge can hold you in contempt and jail you until you comply.
In conclusion, if you’re considering setting up an asset protection trust, whether domestic or offshore, it’s critical to structure it correctly and ensure that you are not making a fraudulent transfer. South Dakota remains the best choice due to its strong privacy protections and favorable trust laws.