US Asset Protection Trusts: Fit for purpose?

2018 April: A recent decision of the Supreme Court of Alaska has provided further evidence that asset protection is best served offshore.

Alaska is one of 17 states in the U.S. to have enacted laws allowing for the creation of self-settled discretionary trusts that are protected from creditor claims. However the Supreme Court’s decision strongly suggests that such protection is only possible where the settlor resides in and his/her assets are sited in the state that enacted those laws.

The main concern for U.S. advisors and their US resident clients in setting up an asset protection trust under the laws of a U.S. state (Domestic Asset Protection Trust), is the U.S. Constitution and in particular the enforceability of the state’s protections when the client resides in another state or is exposed to the jurisdiction of another state’s courts.

In Toni 1 Trust v Wacker, 2018 WL 1125033 (Alaska 2018), the debtors resided in Montana and established an asset protection trust under the laws of Alaska. Upon judgments being entered against them, they transferred assets sited in Montana into the Alaska law trust. The creditor brought an action in Montana to void the transfer to the trust as a fraudulent conveyance and was successful. A bankruptcy trustee sought to have the transfer voided as a fraudulent transfer in federal court, and again was successful. These decisions were made notwithstanding Alaska law conferring jurisdiction regarding fraudulent conveyance claims involving Alaska asset protection trusts exclusively to Alaska state courts.

Upon seeking redress in the Supreme Court of Alaska, the debtor again failed. The Court ultimately ruled that the Full Faith and Credit Clause of the U.S. Constitution does not force states to be bound by another state’s law and The Supremacy Clause of the U.S. Constitution prevents a state from depriving federal courts of their jurisdiction.

It is commonly accepted that these constitutional concerns are not an issue when the trust is established outside of the U.S. and its assets are held outside of the U.S. Asset protection trusts are common place in a number of offshore jurisdictions, none more so than the Cook Islands which was the first jurisdiction to enact specific asset protection provisions into its trust law nearly 30 years ago. HNWIs resident in the U.S. have been the primary users of such trusts, looking to protect their wealth from vexatious and frivolous law suits.

Whilst the convenience and familiarity of a Domestic Asset Protection Trust might provide comfort to U.S. advisors and their clients, the decision of the Supreme Court of Alaska will not. When establishing an asset protection trust, protection of assets is the priority. Having the trust and its assets outside of the US has over many years proven to be the best protection possible and this latest case only serves to reinforce that.