DAPT statutes are designed to protect the DAPT assets of an in-state resident from an in-state creditor on a non-federal claim such as physician malpractice or the like. However, there is uncertainty as to whether a DAPT statute will protect an out-of-state grantor from an out-of-state malpractice claim due to conflict of laws. There are two constitutional claims that may be raised, permitting creditors to pierce the DAPT and reach in to take DAPT assets: (1) the Full Faith and Credit Clause and (2) the Supremacy Clause. Under the Full Faith and Credit Clause, unless there is a public policy argument for not doing so, states are required to respect the judgments of other states. As an example, if an Illinois court holds that an Illinois creditor can reach into the grantor’s Nevada DAPT, Nevada courts are supposed to respect the holding of the Illinois court.
Bankruptcy courts are federal courts and follow both federal and state bankruptcy laws, depending on where a bankruptcy estate is being administered. So, the concern is that if a bankruptcy court applying both federal and, in our example, Illinois law holds that an Illinois creditor can reach in and seize assets in Nevada, under the Supremacy Clause federal law would trump Nevada’s DAPT statute and the Illinois creditor would be able to seize the Nevada DAPT assets.
Also note, if you create a DAPT and later file for bankruptcy, a federal court can retrieve assets transferred to the DAPT during the previous 10 years (Bankruptcy Code §548(e)(1)), if the actual intent on the creation and transfer to the DAPT was to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.
As stated above, as of today, there remains uncertainty as to whether a DAPT will provide a grantor with sufficient physician malpractice protection. Next I will discuss the pros and cons of using a foreign asset protection trust as part of an asset protection strategy for physician malpractice.
More on medical malpractice and asset protection
Next> Foreign Asset Protection Trusts offer an offshore option for protecting your medical practice
More> Medical Malpractice Insurance: A simple primer to answer the question of whether to insure or not insure
More> Medical Malpractice: Looking at a few strategies to protect your medical practice from claims
More> Understanding voluntary disclosure and offshore bank accounts as you protect your foreign assets
Back> Medical Malpractice Claims: Choosing the right type of business entity can be a crucial first step when designing your asset protection strategy
For Educational Purposes Only. This information is being provided for educational purposes only. There are no assurances that the laws or recommendations will achieve user’s desired goals in any or all circumstances. Laws change frequently and vary from location. Therefore, you should always consult with a qualified attorney, accountant, or other expert for assistance.
Circular 230 Disclaimer. Treasury Department Regulations require us to inform you that unless we specifically indicate otherwise, any tax advice in this communication including any links, or attachments cannot be used to avoid any penalty that may be imposed by federal tax law nor to promote or market to another party any matters covered herein.