Protection From Ex-Spouses

Protecting your assets from an ex-spouse is getting easier. My state, South Dakota, joins Nevada in tightening protections on special trusts set up to shield holdings.

Both out-of-staters and South Dakotans can set up one of these vehicles here – they’re called domestic asset protection trusts, or DAPTs – to protect assets from former spouses and other creditors. My state permitted the trusts in 2005, and this year made breaching them harder than ever for ex-husbands and ex-wives, as Nevada has done.

Typically, after you set up such a trust in a state that offers them, creditors have a year or two to make claims on the assets inside a DAPT. But divorcing spouses were an exception in every place except Nevada: They had an unfettered ability to tap DAPTs. Recently, though, South Dakota Governor Dennis Daugaard signed a Nevada-like law that protects the assets from the moment you transfer them into a trust. Starting July 1, South Dakota trusts also are off-limits to divorcing spouses’ future claims.

This change does not 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 is fraud.

What the new wording means is that, once a divorce settlement is struck, 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 divorces, the husband 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 tries to benefit from his post-divorce success by suing for a share of his assets. He can 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 still lives in the house, however, and the value of the property has increased significantly. He sues to amend the original agreement, in an effort to claim part of the real estate. But his attempt to change the agreement after the fact can't touch that property if she transferred it to a DAPT.

While DAPTs will likely hold up to legal challenges in the states that offer them, according to legal experts, there is not enough case law yet to know how courts may treat them.

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.

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Rick Kahler, CFP, is president of Kahler Financial Group in Rapid City, S.D.
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