Alaska was the first state to adopt what is commonly known as asset protection trust legislation in 1997. This was done to compete with the myriad of overseas jurisdictions offering opportunities for U.S. residents to create a special type of trust to protect the assets placed in the trust from a future financially ruinous unforeseen lawsuit filed against him or her. What we didn’t know for sure was whether the domestic asset protection trust (DAPT) would actually work. There are federal laws that trump state law that could override the assets protection trust laws any state might enact. Well, the question appears to now be answered by the Alaska Supreme Court.
The Tangwalls, residents of Montana lost a lawsuit to the Wackers in the Montana courts. Shortly before any judgments were issued, the Tangwalls transferred their real property to an Alaska Asset Protection Trust (DAPT).
The judgment creditors brought a fraudulent transfer case against the Tangwalls and the trustees of the DAPT in Montana, asserting that under Montana law the transfers were voidable as fraudulent. The Montana Court ordered the transfers of the property to the Alaska DAPT set aside. Before Wacker could levy on property in the DAPT, Toni, one of the judgment debtors, filed for Chapter 7 bankruptcy in Alaska.
By filing for Bankruptcy in Alaska, Toni brought the trust property under the jurisdiction of the Alaska Bankruptcy court. The bankruptcy trustee eventually successfully filed a fraudulent transfer action under §548 of the Bankruptcy Code. The transfers to the DAPT had now been declared void by two courts. Tangwell’s answer was to bring a suit in Alaska seeking to have the Montana and Federal judgments set aside under Alaska law.
In Toni 1 Trust v. Wacker, 2018 WL 1125033 (Alaska Mar. 2 2018), the Alaska Supreme Court analyzed allegations of fraudulent transfer through the lens of Alaska Statutes, specifically AS § 34.40.110(k), which provides that Alaska courts have “exclusive jurisdiction” over all actions involving transfers to Alaska DAPTs. The ultimate question was, “Can Alaska compel Federal Courts or the courts of its sister states to recognize its declaration that questions involving Alaska DAPTs be solely heard by Alaska courts?” When phrased that way the answer seems obvious – not surprisingly the Alaska Supreme Court held that it could not.
The Alaska Supreme Court ruled that the Full Faith and Credit Clause of the US Constitution does not require states to follow other states’ statutes claiming exclusive jurisdiction. It further found that, pursuant to the Supremacy Clause of the US Constitution, states cannot restrict federal jurisdiction, even in cases where the state itself created the right being litigated. Accordingly, the Alaska Supreme Court held that Alaska’s DAPT statute was unenforceable to the extent that it attempted to limit other states or federal courts from hearing fraudulent transfer actions concerning Alaska Foreign Trusts.
The “Take Away”
If you are not a resident of the state under which you establish your DAPT, unless the time within which a creditor may file a fraudulent transfer lawsuit has expired, the DAPT may not be worth the paper it is written on. When the creator of the DAPT is a resident of the DAPT state then the DAPT can be an effective tool, subject to certain Federal laws that trump state law.[1]
Solutions
Over 15 million lawsuits are filed in the U.S. each year. Protecting your assets from a financially ruinous lawsuit has never been more important. So if the DAPT is not an option, what can one do?
Foreign Asset Protection Trusts
The Foreign Asset Protection Trust (FAPT) protects your assets without the major flaw of the Domestic Asset Protection Trust. Establishing a trust in a foreign country removes the concept of “comity” or one country refusing to recognize the laws of another country. Certain countries have trust laws that expressly state the laws of other countries will not be recognized by the country of the trust’s domicile. Simply stated, a US Court having no jurisdiction over the trustee or the trust property may not enforce a judgment against a FAPT.
FAPTs are ‘battle tested’ and have held up for decades as the most protective form of asset protection trusts that exists.
Creating a FAPT trust requires skills and experience not generally possessed by most trust and estate lawyers. For almost 30 years, this law firm has been helping cleints design and implement effective FAPT planning. Please contact our office if you wish to find if the FAPT would work for you.
[1] Sec.548(e)(1) giving a bankruptcy trustee up to 10 years to set aside the transfer to a self-settled trust or other similar device.