Most financial advisors and attorneys who specialize in asset protection trusts have probably never visited South Dakota. Yet it’s one of their favorite places. A change made by the legislature this year has made them like it even more.
The reason asset protection experts are so fond of our state is that South Dakota is one of a few states (Nevada, Delaware, and Alaska are the others) to offer some of the strongest protections available for Domestic Asset Protection Trusts (DAPTs).
House Bill 1056, passed by the legislature and signed into law by Governor Dennis Daugaard, includes a small change in wording that makes DAPTs even stronger. The relevant section amends South Dakota Codified Law 55-16-15 by adding the five words shown here in all caps:
“Notwithstanding the provisions of §§ 55-16-9 to 55-16-14, inclusive, this chapter does not apply in any respect to any person to whom AT THE TIME OF TRANSFER the transferor is indebted on account of an agreement or order of court for the payment of support or alimony in favor of the transferor’s spouse, former spouse, or children, or for a division or distribution of property in favor of the transferor’s spouse or former spouse, to the extent of the debt. . . .”
This change is not intended to allow divorcing spouses to hide assets from one another, cheat ex-spouses out of alimony, or avoid paying child support. Someone who owes alimony or child support to a former spouse cannot get out of that obligation by contributing assets to a DAPT. Any amounts owed at the time the trust is established must be paid. Attempting to avoid legitimate obligations through a DAPT would be fraud.
What the new wording means is that, once a divorce settlement has been agreed upon, former spouses cannot come back later and make new claims against an ex-wife or ex-husband’s protected assets.
For many people, this change is irrelevant. Many divorcing couples, probably the majority, don’t have many financial assets and have never heard of a DAPT. They work out a financial settlement, go their separate ways, and that’s that.
Yet there are cases where this new law could make a huge difference. Here are just two examples:
Suppose that at the time a couple divorce, the husband had just started a construction company. It had more debt than assets and wasn’t making any money yet. Several years later, business is booming and he is well on his way to becoming wealthy. Even though his ex-wife was not involved in building the company, she might try to benefit from his post-divorce success by suing for a share of his assets. He could protect those assets by contributing them to a DAPT.
Or suppose a divorce settlement required the wife to pay her husband a one-time cash amount in exchange for his share of their house and acreage. Several years after the divorce, he isn’t doing so well financially. She’s still living in the house, however, and the value of the property has increased significantly. He might sue to amend the original agreement in an effort to claim part of the real estate. His attempt to change the agreement after the fact couldn’t touch that property if she had contributed it to a DAPT.
Until now, Nevada was the only state whose DAPT laws did not make an exception for former spouses. This change in the South Dakota law makes the two states very comparable in their DAPT provisions. It’s one more reason for asset protection professionals to find South Dakota a great place to do business.