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Is a South Dakota Trust the Best for Asset Protection?

by | Sep 1, 2020 | Trusts | 0 comments

South Dakota claims to be becoming the global leader in sheltering fortunes from governments and tax authorities. Wealthy individuals are sheltering $300 billion in South Dakota trusts, according to one source. You may have heard about how Texas billionaire Ed Bosarge hid his wealth from wife Marie prior to filing for divorce. So, is it true that a South Dakota Trust is the best for asset protection?

Quick facts about the Bosarge divorce.

Texas billionaire Ed Bosarge and his wife, Marie, were married for over 30 years. Marie believes Ed is worth $2 billion. During their marriage, Ed and Marie accumulated an unusual collection of treasures. They owned 12 homes, including five properties in Maine and a private island in the Bahamas. They had a 180-foot sailing yacht with its own grand piano. They bought a $5 million Egyptian mummy. Marie bought some of Marilyn Monroe’s personal effects, including her furniture, dresses and bras.

However, when Ed filed for divorce in 2017, Marie discovered that Ed had put almost all of the couple’s property — from the homes and island to her jewelry and even some of their tableware — into special trusts that shielded the assets from any claims. Rather than getting half of the $2 billion fortune, Marie may wind up with little or nothing after paying her legal bills.

In a lawsuit, Marie Bosarge claims that Ed created the various trusts “to hide income and property and to hold what would otherwise have been personal income and assets.”

Just how protected is Ed Bosarge’s wealth?

There may be a third party to the Bosarge divorce. And no, I’m not talking about the Russian mistress Ed reportedly had. I’m referring to the IRS. You see, Marie Bosarge alerted the Internal Revenue Service in her 2017 solo tax return to where they can look for Ed’s secret money stashes. At the end of her tax return Marie added “Exhibit A” — a document from financial services powerhouse BDO. The document lists all of the trusts and entities that BDO had discovered that were connected to Ed Bosarge.

Some of the trusts and entities have some pretty unique names. Spotted Leopard. New Ostrich. Big Bird Partners. Black Rhino. Mountain Song. Last Samurai. Dangerous Beauty. There are more than 150 trusts and entities listed over five pages.

Marie claims that after thirty years of marriage, Ed left her broke. She also claims he is hiding billions of dollars in secretive trusts in South Dakota and around the world. The jury trial in the Bosarge divorce is delayed by the Coronavirus pandemic. So we won’t know the final outcome for some time.

In recent documents filed in the divorce case, Marie’s lawyers claim that Ed is refusing to turn over necessary financial records that can help her prove the fraud and other key elements of her case. The highly publicized Bosarge case may pit Texas courts against South Dakota courts. If a Texas jury finds that Ed committed fraud, will South Dakota allow Marie to get what is hers out of the South Dakota trusts? Or will South Dakota simply ignore the rulings and the will of courts in Texas? We don’t have these answers yet.

Texas Trust Vs. South Dakota Trust

The case pits Texas’ majority rule vs. South Dakota’s new modern rule. Texas (and the majority of other states) still hold to the rule that a creditor of the settlor may reach the largest amount that can be distributed to or for the settlor’s benefit. (In other words, you can’t transfer assets to a trust for your own benefit and still expect those assets to be protected from your creditors.) South Dakota has reversed that rule. It allows what is called a Domestic Asset Protection Trust (or DAPT). A DAPT purports to allow you to create a trust, remain a beneficiary of the trust, but shield that trust from your creditors (including your spouse).

Sounds great in theory. But the case law and statutes in most states say it doesn’t work. Domestic Asset Protection Trusts (or DAPTs) only protect you if you live in the state and you are not in bankruptcy. (Ed does NOT live in South Dakota.) It may also protect you in bankruptcy if the trust is more than 10 years old.

The IRS May Do Some of the Work for Marie

If the IRS determines that Ed Bosarge committed fraud in hiding assets and income, Marie may be able to use that court finding in her divorce action. Furthermore, the IRS will determine what assets there were, and their value. Again, Marie can use that information in her divorce action.

South Dakota is Supposed to Honor a Texas Court’s Ruling of Fraudulent Transfer

Let’s say the Texas court issues a ruling that Ed fraudulently hid assets from his wife. It then enters an order that Ed’s South Dakota trusts turn over assets to Marie. What then?

South Dakota (like all the other states) is supposed to honor court rulings and laws of every other state. Article IV, Section 1 of the United States Constitution, reads:

Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.

And we know from the Toni 1 Trust case that a South Dakota court is supposed to honor a Texas Court’s ruling that Ed fraudulently transferred assets to keep them from Marie and the IRS. (Assuming the Texas court makes that ruling.)

Texas Has a Trump Card

But even if South Dakota decides not to honor a Texas court ruling (as required by U.S. Constitution and established case law), Texas could simply throw Ed in jail for contempt of court. (The theory would be that Ed had practical control over his trusts. Perhaps the court rules that the assets were community property, so they are presumed to be one-half Marie’s. So if he fails to convince the South Dakota trust companies to turn over assets to Marie, he should go to jail until he does so. That is similar to what happened in the 1999 Anderson case involving a Cook Islands trust.)

Conclusion

We don’t know yet what facts or law will decide the dispute between the Bosarges. My hunch is that one or more of the following will happen:

  • The Texas court will find that at least some of the trust assets are community property, and Marie is entitled to one-half, AND/OR
  • The Texas court will rule that Ed committed fraud by hiding assets from Marie, AND/OR
  • The Texas court will enter a judgment in Marie’s favor and rule that Marie is entitled to be paid her one-half share from Ed’s trusts, AND/OR
  • The Texas court could find that Ed was failing to treat the trusts as separate legal entities. The court would apply one of a variety of theories, called reverse veil piercing, alter-ego, constructive trust, or a sham transaction theory to simply disregard the trusts and treat them as community property. AND/OR
  • The Texas court will hold Ed in contempt of court and threaten to put him in jail until he pays whatever he is deemed to owe Marie.

NONE OF THESE OUTCOMES WOULD SUPPORT SOUTH DAKOTA TRUSTS AS OFFERING PROTECTION, AT LEAST IN THE CONTEXT OF A MARRIAGE IN A COMMUNITY PROPERTY STATE.

So, what could Ed have done instead?

From a legal standpoint, Ed could have had a prenuptial agreement. He could have had a postnuptial agreement. He could have transferred assets to trusts in which he was not the beneficiary. There are actually a lot of possibilities I can think of here.

From a human standpoint, he could possibly share some of the $2 billion with Marie and not have to fight her.

There is a saying that pigs fat, but hogs get slaughtered.

I predict that the Texas court is going to punish Ed for being a jerk and trying to keep all of the accumulated wealth from his wife.

If I were advising Ed prior to getting married, I would tell him:

  1. Don’t use Domestic Asset Protection Trusts (in South Dakota or anywhere).
  2. Don’t fraudulently conceal assets from his wife.
  3. Get a prenuptial agreement.
  4. Don’t be so cheap. It’s okay for his wife to receive some of the community property in the event they get a divorce.
  5. Use an Asset Vault Trust (TM) rather than a Domestic Asset Protection Trust.

What is an Asset Vault Trust (TM)?

An Asset Vault Trust (TM) it is not a self-settled trust (like a DAPT). Second, it includes a Special Power of Appointment. The Special Power of Appointment provides flexibility. It allows the settlor to change the trustees, the beneficiaries, or the terms of the Asset Vault Trust (TM) at any time. But, the assets cannot be distributed to or for the settlor’s benefit, or the benefit of settlor’s creditors.  Also, the settlor can appoint assets to any other person at any time (i.e., direct that assets be transferred to another person). Creditors (and spouses) do not have a claim to assets inside an Asset Vault Trust (TM). The reason is that the trustee is not permitted to make distributions for the settlor’s benefit. There are no statutes, cases, secondary sources or commentaries to the contrary.

Since someone like Ed Bosarge wants to have the use and enjoyment of his wealth, put it in one or more limited partnerships. He can be the 1% General Partner. And the Asset Vault Trust (TM) can be the 99% non-managing limited partner. It is then perfectly legal and legitimate for him (as General Partner) to have use and enjoyment of assets that are owned in the limited partnership. His yacht could be in a separate LLC owned by the limited partnership. His business ventures could also be owned 99% by one or other Asset Vault Trusts (TM). Then the increase in value during the marriage would not be presumed community property because he is not a trustee or beneficiary.

The point is to not simply rely on marketing material about South Dakota Trusts. Rather, use proven, effective legal strategies that we know have worked for generations.

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