In 2014, Mississippi enacted the Mississippi Qualified Disposition in Trust Act,[1] which amended the former provisions of the Mississippi Trust Code to allow the creation of a “qualified disposition trust,” also known as a domestic asset protection trust (“DAPT”). Generally, assets placed in trust by someone other than a beneficiary are protected from such beneficiary’s creditors, but assets placed in trust by a beneficiary are subject to such beneficiary’s creditors.[2] The reasoning behind this general rule is clear: a debtor should not be able to transfer his assets in trust, consume or otherwise use the assets as if still held in his individual name[3], and subsequently claim that these assets are not subject to his creditors’ claims. A DAPT provides an exception to this general rule. Provided that certain statutory requirements are met, a person can transfer assets to a DAPT, and following a statutory holding period, avoid such assets being subject to the claims of the transferor’s creditors (again, subject to certain exceptions). This article will explore the statutory requirements for a valid DAPT in Mississippi.
Requirements for a valid DAPT in Mississippi
Mississippi is one of a handful of states[4] which permit an individual to establish a trust for their own benefit and have the transferred trust assets exempt from the claims of the transferor’s creditors. When establishing a DAPT, it is necessary to comply with the terms of the Mississippi Qualified Disposition in Trust Act. Such statute provides that a qualified disposition trust, or DAPT, is “a trust instrument appointing a qualified trustee or qualified trustees for the property that is the subject of a disposition, which instrument:
- expressly incorporates the law of [Mississippi] to govern the validity, construction, and administration of the trust;
- is irrevocable; and
- provides that the interest of the transferor or other beneficiary in the trust property or the income from the trust property may not be transferred, assigned, pledged or mortgaged, whether voluntarily or involuntarily, before the qualified trustee or qualified trustees actually distribute the property or income from the property to the beneficiary.”[5]
In other words, a Mississippi DAPT must be an irrevocable Mississippi trust whose terms include a spendthrift provision, subject to additional requirements, including a “qualified disposition” to a “qualified trustee” and the execution by the DAPT’s grantor of a “qualified affidavit.” These terms are defined under Miss. Code Ann. § 91-9-703 as follows:
- A “qualified disposition” is a disposition by or from a transferor to a qualified trustee or qualified trustees, with or without consideration by means of a qualified disposition trust, after the transferor executes a qualified affidavit.[6]
- A “qualified trustee,” is a person who meets all of the following criteria:
- in the case of a natural person, is a resident of Mississippi, or in all other cases, is authorized by the law of the State of Mississippi to act as a trustee and whose activities are subject to supervision by the Mississippi Department of Banking and Consumer Finance, the FDIC, the Comptroller of Currency, or the Office of Thrift Supervision (or any successor to them);
- Maintains or arranges for custody in Mississippi of some or all of the property subject to the qualified disposition, maintains records for the trust on an exclusive or nonexclusive basis, prepares or arranges for the preparation of required income tax returns for the trust, or otherwise materially participates in the administration of the trust; and
- Is not the transferor[7]
- A “qualified affidavit” means a sworn affidavit signed by the transferor before making a qualified disposition and must state the following:
- The transferor has full right, title, and authority to transfer the assets to the trust;
- The transfer of the assets to the trust will not render the transferor insolvent;
- The transferor does not intend to defraud a creditor by transferring the assets to the trust;
- The transferor does not have any pending or threatened court actions against the transferor, except for those court actions identified by the transferor on an attachment to the affidavit;
- The transferor is not involved in any administrative proceedings, except for those administrative proceedings identified on an attachment to the affidavit;
- The transferor does not contemplate filing for relief under the provisions of the federal bankruptcy code;
- The assets being transferred to the trust were not derived from unlawful activities; and
- The transferor is a named insured of a general liability insurance policy and, if applicable, a professional liability insurance policy, with policy limits of at least One Million Dollars ($1,000,000.00) for each respective policy.[8]
In summary, a valid Mississippi DAPT must be an irrevocable trust which includes a spendthrift provision and governed under the laws of Mississippi, must be transferred to a trustee (who is not the transferor) who, if a natural person, is a Mississippi resident, or if not, is an institutional trustee duly authorized to act as such in Mississippi. Importantly, before making such transfer, the transferor must execute a qualified affidavit.[9] Note also that the requirement to execute a qualified affidavit applies to subsequent transfers to the DAPT, not just the initial funding, so a new qualified affidavit must be executed by the transferor prior to all subsequent qualified dispositions to the DAPT.
Creditor Protection and Exceptions Thereto
Utilization of a DAPT is typically motivated by, and generally provides, protection of assets from the claims of the transferor’s creditors while also allowing the transferor to receive distributions. In fact, the terms of the Mississippi Qualified Disposition in Trust Act expressly provide, “Notwithstanding any law to the contrary, no action of any kind, including, but not limited to, an action to enforce a judgment entered by a court or other body having adjudicative authority, shall be brought at law or in equity for an attachment or other provisional remedy against property that is the subject of a qualified disposition or for the avoidance of a qualified disposition.”[10] However, there are exceptions to this generality.
Exception Creditors
The statute expressly provides that the protections afforded by a DAPT shall not apply for claims made by the following:
- Any person to whom the transferor is indebted on account of an agreement or order for support or alimony of the transferor’s spouse, former spouse, or children, or for a division of property, but only to the extent of such debt;
- Any person suffering death, personal injury, or property damage before the date of the qualified disposition if such death, injury, or damage was caused, in whole or in party, by the tortious act or omission of the transferor or person for whom the transferor is vicariously liable;
- The State of Mississippi; or
- Any creditor in an amount not to exceed $1,500,000 if the transferor failed to maintain the required $1,000,000 umbrella policy.[11]
Limitations Period
A transferor cannot simply comply with the requirements above and consider all the assets transferred to the DAPT out of reach of his or her creditors. As mentioned previously, there are certain limitations periods before the statutory protection of a DAPT truly takes effect, bifurcated between creditors who existed before the assets were transferred to the DAPT and those who became creditors thereafter.[12] A preexisting creditor (that is, a creditor in existence at the time of a qualified disposition to a DAPT) is limited to commencing an action on the later of either (i) two years after the transfer or (ii) six months after the creditor discovered or reasonably should have discovered the qualified disposition.[13] For those who become creditors of the transferor after the qualified disposition to a DAPT, the action must be commenced within two years after the qualified disposition is made.[14]
While these limitations periods provide a window of opportunity for creditors to pursue a claim, in conjunction with the fraudulent transfer exception, discussed below, the utilization of a DAPT shortens the limitations period, with respect to fraudulent transfers, from the generally applicable three years[15] to the periods provided above. Also noteworthy, a transferor in a bankruptcy proceeding may lose the protection of the DAPT, as under the applicable provisions of the Bankruptcy Code[16], if the trustee can establish that the transfer to the DAPt was made “with actual intent to hinder, delay, or defraud any entity to which the [transferor] was or became, on or after the date such transfer was made, indebted,”[17] the bankruptcy trustee may be able to avoid any transfers made within ten years of the bankruptcy filing.
Fraudulent Transfer Exception
A transferor cannot create and fund a DAPT for the purpose of defrauding a creditor (and the transferor must swear such is not his intent in the qualified affidavit.) The law does provide creditors some relief if they suspect transfers were made for this fraudulent purpose. The burden is on the creditor to prove by clear and convincing evidence that the transferor’s disposition of the property was made with the intent to defraud that specific creditor.[18] Given the burden is on the creditor to prove the transfer was made with the intent to defraud (and specifically with respect to the claiming creditor) a DAPT provides a protective environment for assets and presents an uphill litigious climb for creditors of the transferor.
Conclusion
Given the relatively new enactment of the Mississippi Qualified Disposition in Trust Act, there has been little litigation and consequential case law regarding the protection provided by a Mississippi DAPT. Still, this Mississippi statute, modeled after similar statutes in Delaware, provides a unique planning opportunity for those individuals who wish to undertake slightly more sophisticated planning steps during their lifetime to protect their assets. For those who do, it is important to strictly comply with the statutory guidelines so as to not become one of the dreaded “bad facts” case where the Court unwinds some or all of the protection it was intended to provide.[19]
[1] Laws 2014, Ch. 513 (H.B. No. 846), § 1, eff. July 1, 2014; Miss. Code Ann. § 91-9-701 et seq.
[2] Miss. Code Ann. § 91-8-501, et seq.
[3] Note that except as provided in the Mississippi Qualified Disposition in Trust Act, a creditor of the settlor of an irrevocable trust may reach the maximum amount that can be distributed to or for the settlor’s benefit. Miss. Code Ann. § 91-8-504(a)(2).
[4] See the following comprehensive chart of the various state domestic asset protection trust statutes, prepared by Dave Shaftel and contributed to by Gray Edmondson: https://shaftellaw.com/docs/article-43.pdf.
[5] Miss. Code Ann. § 91-9-703(n).
[6] Miss Code Ann § 91-9-703(j).
[7] Miss. Code Ann. § 91-9-703(k).
[8] Miss. Code Ann. § 91-9-705. Note that professional settlors will need both a $1,000,000 general liability policy AND a $1,000,000 professional liability policy.
[9] In practice, it would prove prudent to execute the qualified affidavit immediately prior to making the qualified disposition.
[10] Miss. Code Ann. § 91-9-707(a).
[11] Miss. Code Ann. § 91-9-707(i)(1).
[12] To enjoy the benefits of these shortened limitations periods, it is practically prudent to document any and all transfers to a DAPT, preferably in the public record.
[13] Miss. Code Ann. § 91-9-707(b)(1)(A).
[14] Miss. Code Ann. § 91-9-707(b)(1)(B).
[15] Miss. Code Ann. § 15-3-115.
[16] 11 U.S.C. § 548(e)(1).
[17] 11 U.S.C. § 548(e)(1)(D)
[18] Miss. Code Ann. § 91-9-707(b)(2)(B).
[19] For an example of a “bad facts” case, see Waldron v. Huber, 493 B.R. 798 (Bankr. W.D. Wash. 2013).
