Article

• Jurisdiction: Utah,United States
• Citation: Vol. 35 No. 6 Pg. 44
• Date: 01 December 2022
• Publication year: 2022
• Pages: 44
• Year: 2022
• topic: Trust Law,Creditor Rights / Civil Enforcement,Family Law

Article Vol. 35 No. 6 Pg. 44 Utah Bar Journal December, 2022

November, 2022

Resolving The Dahl Conundrum: The Public Policy Conflict Between Asset Protection Trusts and The Equitable Division of Marital Assets

by Alexander Chang and Bart J. Johnsen

Utah has a strong public policy favoring the equitable distribution of marital assets upon divorce. See Dahl v. Dahl, 2015 UT 79, ¶ 25, 495 P.3d 276. The Utah Legislature has also endorsed the asset protection trust (APT), allowing a settlor to be an irrevocable trust beneficiary and receive spendthrift protections from their creditors. See Utah Code Ann. § 25-6-502. However, a public policy conflict arises between trust and divorce law when, upon divorce, only one spouse is the beneficiary of an APT that contains marital property.

In Dahl, the Utah Supreme Court narrowly avoided addressing this conflict when an APT was the subject of a divorce proceeding See Dahl v. Dahl, 2015 UT 79. The supreme court was able to reach the marital property inside the trust without invalidating the AP statute because the trust was revocable under Utah law, and the divorce court could reach the property of a revocable trust. Id. ¶ 32. The supreme court noted that an irrevocable APT funded by marital assets in a divorce proceeding would "create a serious conflict between trust law and divorce law." Id. ¶ 39 n.13.

The resolution to this conflict seems black-and-white: either the courts are powerless to equitably distribute marital assets inside APTs, or the APT statute and its nearly two decades-long statutory history is at least partially invalid. In the absence of the Utah Legislature intervention, the courts must navigate this issue carefully when inevitably faced with this conflict in the near future.

ALEXANDER CHANG is a law student at the University of Utah and completed his directed research project on Utah asset protection trust statute.

The Asset Protection Trust and Its Features

APTs are typically irrevocable, self-settled spendthrift trusts - an aberration of the centuries-old common law rule that a settlor creditors can reach trust assets if the settlor is also a trust beneficiary. See Restatement (Second) of Trusts § 156 (AM. L. INST.1959) ("[W]here a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum among which the trustee under the terms of the trust could pay to him or apply for his benefit."). Seventeen jurisdictions, including Utah, have overridden the common law by statute, allowing a settlor to also be a trust beneficiary without sacrificing protection from creditors. See Utah Code Ann. § 25-6-502.

Key protective features of a properly-constructed APT include that a creditor sole remedy - in law or in equity - is a fraudulent/ voidable transfer action under the Uniform Voidable Transfers Act (UVTA). See Utah Code Ann. § 25-6-202, -502(3), -502(9)(a). Furthermore, APTs have a reduced statute of limitations for a voidable transfer claim, requiring the claim to be brought within two years instead of the UVTA four. Compare Utah Code Ann. § 25-6-502(9)(c), with Utah Code Ann. § 26-5-305. Utah APT statute also features a unique notice provision that reduces timeliness of a UVTA claim to just 120 days if the transferor gives actual or publication notice of the transfer to creditors. See Utah Code Ann. § 25-6- 502(9)(c)(ii).

BART J. JOHNSEN is a shareholder at Parsons Behle & Latimer where he exclusively practices family law.

Most importantly, the settlor may substantially benefit from and indirectly control trust property. The statute allows a settlor to use real or personal property of the trust without compensation, serve as co-trustee, consent to or veto distributions, and pay property taxes, insurance premiums, maintenance expenses, or other expenses of trust property. See Utah Code Ann. § 25-6-502(7). An APT can essentially be structured so that the settlor enjoys a luxury lifestyle using trust assets while being practically judgment-proof.

The Dahl Conundrum

In Dahl, wife and husband contributed marital property to a Nevada APT that named Dr. Dahl and his "spouse" as the beneficiaries. Dahl, 2015 UT 79, ¶ 34. Upon their divorce, the wife beneficiary status was terminated by operation of the trust agreement language. Id. The wife sought a declaratory judgment, arguing the trust was void or the trust was revocable. I...