Probate & Trust Law Section Conference Manual ... - Minnesota CLE

property interests. 206 This can be advantageous from an asset protection standpoint. Delaware,
Nevada, and Wyoming have much more limited versions of this statute. 207
6. LLC AND LP STATUTES
As previously discussed, the location of trust property is an important consideration from an asset
protection standpoint. Consequently, many individuals title assets located in other states to an
LLC or LP in the DAPT state, which in turn is titled to the DAPT. Using the DAPT’s state
LLC/LP laws further ties the trust property to the jurisdiction of the self-settled trust, allowing for
increased asset protection. The asset protection afforded by LLC and LP statutes varies by state.
Some states, such as South Dakota, have “sole remedy charging order” protection which is
generally considered the most desirable. 208 A charging order only gives a creditor the rights of a
partnership or LLC interest, and it does not give a creditor any voting rights. A charging order is
simply a right to a distribution, if and when one is ever made, and it leaves a creditor without any
means to force a distribution. This results in a waiting game between the client and the creditor,
which usually forces the creditor to settle for significantly less than the original judgment amount.
Many states have judicial foreclosure sale statutes, which allow a creditor to obtain a charging
order but no voting rights. 209 A creditor will then typically complain to the court that no
distributions have been made from the partnership or LLC. As an additional remedy, the court
may then order a judicial foreclosure sale of the limited partnership interest or LLC, which may
or may not completely pay off the judgment debt. These statutes generally do not provide great
asset protection. A DAPT in a state without a sole remedy charging order statute drastically
weakens the asset protection planning.
7. SPECIAL PURPOSE ENTITY
To add situs connections to the DAPT state, some advisors suggest the use of a Special Purpose
Entity (SPE); however, only a few states currently allow for these types of entities. South Dakota
is the only state that recognizes these entities by statute, which has established South Dakota one
of the more popular states for SPEs. 210 SPEs are typically LLCs or some other form of corporate
entity that can function as the investment advisor, distribution advisor and/or trust protector in a
directed trust structure. However, please note that the SPEs are not a trust company. The sole
purpose of the SPE is to direct the administrative trustee as to the trust investments, distributions
and/or trust protector functions. Many advisors suggest that the SPE may further add to the situs
connection with the DAPT state by creating an entity in the DAPT state that serves in the directed
trust roles instead of having fiduciaries of the trust in the grantor’s resident state.
206 SOUTH DAKOTA CODIFIED LAWS § 55-1-26.
207 DEL. CODE ANN. tit. 12, § 3315; NEV. REV. STAT. ANN. §§ 163.417, 163.4185, 163.4189; WYO. STAT. ANN. § 4-
10-504.
208 See SOUTH DAKOTA CODIFIED LAWS §§ 47-34A-504, 48-7-703; ALASKA STAT. §§ 32.11.340, 10.50.380; DEL.
CODE ANN. tit. 6, §§ 17-703, 18-703; NEV. REV. STAT. §§ 88.535, 86.401; OKLA. STAT. tit. 18, § 2034; TENN. CODE
ANN. § 48-218-105; VA. CODE ANN. §§ 50-73-46:1, 13.1-1041.1; WYO. STAT. ANN. § 17-15-145.
209 Mark Merric, The Asset Protection Behind a Charging Order, Merric Law Firm LLC; see HAW. REV. STAT. §§
425D-703, 428-504; UTAH CODE ANN. § 48-2c-1103.
210 SOUTH DAKOTA CODIFIED LAWS § 51A-6A-66.
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