South Dakota initially enacted its “Qualified Dispositions in Trust” Act (the “Act”) in 2005. This Act allowed an individual to create an asset protection trust subject to South Dakota law, designate himself or herself as a beneficiary of the trust, transfer assets into the trust and, once the two-year statute of limitations expires, receive protection from his or her creditors.
Interestingly, a loophole in the Act existed between 2005 and 2014, whereby a married transferor of assets into a South Dakota asset protection trust was not required to provide notice to his or her spouse that the transferor was transferring either (a) his or her separate property into an asset protection trust; or (b) marital property into an asset protection trust. As further discussed below, this loophole could result in one spouse transferring either separate and/or marital property into a South Dakota asset protection trust without the other spouse’s knowledge, the unintended consequences of which would be the other spouse unknowingly forfeiting his or her rights to the transferred assets with no legal recourse in the event of a dissolution of marriage.
There is currently a pending divorce proceeding in Houston, Texas between a billionaire couple in which this loophole has received recent scrutiny. The couple married in 1989. In 1998, Husband founded what became an extremely successful high-frequency trading company.
During their marriage, the couple accumulated assets including 12 homes (including mansions in Aspen, Houston, a London flat worth approximately $45 million and five separate properties in Maine) and a private island in the Bahamas.
In 2017, Husband filed for divorce. Wife subsequently learned that during their marriage, Husband had transferred ownership to the overwhelming majority of the couple’s assets into a South Dakota asset protection trust. Wife alleges that Husband used such trusts to eliminate her share in the couple’s assets, which prevents her from accessing what she surmises to potentially amount to billions in dollars in cash and other property.
Wife and her attorneys have identified up to $2 billion in assets that are currently held in trust. In an October 2019 deposition, Husband stated that the trust assets were worth at least $800 million. Further, Husband’s attorneys assert that the trust’s assets are not controlled by Husband, but instead by the trustees. In fact, Husband and his attorneys allege that the couple’s community estate is worth “only” about $12 million.
In 2014, South Dakota’s legislature addressed the issue of whether an ex-spouse could assert a claim against marital property held in a South Dakota asset protection trust, which would create a conflict between creditor protection and fairness to the ex-spouse considerations. The Act was revised in order to balance these conflicting interests. Now, if a spouse transfers marital property into a South Dakota asset protection trust, the other spouse must be notified of such transfer. Notice to the spouse must include various information and warnings to the spouse, including: (1) that marital property is being transferred; (2) if the couple divorces, access to such transferred marital assets could be hampered; and (3) how a spouse may object to the transfer.
While this 2014 update to the Act might help future individuals, it still remains to be seen how Wife will be financially impacted by Husband’s prior transfers of somewhere between $800 million and $2 billion at a time when no notice was required to be provided between spouses pursuant to South Dakota law.