Law for sale: Alaska and Delaware compete for the asset protection trust market and the wealth that follows.

AuthorWagenfeld, Amy Lynn
PositionThe Rise of the International Trust
  1. INTRODUCTION

    Imagine the following example of a typical asset protection minded individual: a married man with children who has amassed a good deal of wealth as a successful surgeon. Like many high-net-worth professionals, he is worried about the potential of a lawsuit and the devastating effect it would have on his hard earned fortune.(1) With no known existing creditors, he transfers the majority of his assets into a trust created under the laws of the Cook Islands.(2) His only stated purpose for creating the trust is to preserve his family's fortune for the benefit of himself, his wife, and his children. Subsequently, he receives notice that his medical malpractice insurance will be canceled. As a result, he decides to switch to a lower risk practice area and gives up surgery to become a general practitioner.(3) However, even general medicine is not risk free; during the treatment of a patient he commits medical malpractice. The injured patient sues and receives a judgment award of $500,000 only to learn that almost all of the doctor's assets are located in an offshore trust.(4) Cook Islands law does not recognize U.S. judgments, so the victim cannot enforce this judgment against the assets located in trust.(5)

    Unlike most states in the United States, the Cook Islands do allow the creator of a trust to be a trust beneficiary' and to exercise a certain degree of control over the disposition of the trust. This means that the doctor may receive payments of income from the same trust assets that are unavailable to satisfy the victim's judgment--essentially he gets the best of both worlds. This result seems unfair to the unsatisfied victim.

    This outcome does not resonate well with what has traditionally been the well-settled principle of U.S. law that one should not be able to benefit from and control property that is inaccessible to his creditors. Nonetheless, two states have modeled their trust laws after this paradigm. Alaska and Delaware recently passed legislation that may make it possible for any U.S. citizen to set up a trust in the United States that achieves benefits previously attainable only through offshore trusts.(6)

    For years, U.S. citizens have looked to offshore jurisdictions to create trusts that protect a settlor's assets from the claims of creditors, yet allow the settlor to be named as a beneficiary.(7) United States law and public policy have long been against the idea of allowing a person to enjoy benefits from assets that are simultaneously shielded from creditors' claims.(8) However, despite this existing public policy, Alaska and Delaware have enacted statutes that attempt to do just that.(9) Essentially, these statutes claim to make what used to be possible only offshore, now possible in the United States.

    This Note seeks to show that regardless of whether the new legislation is effective in protecting assets from creditors, its mere passage seems to mark a break from long-standing U.S. public policy against self-settled spendthrift trusts.(10) This well-established policy, reflecting ideas of equity and fairness, dictates that debtors should use available resources to pay their debts.(11) This policy is most pronounced in situations where people are able to successfully shield their trust assets from such involuntary creditors as spouses, children, and tort victims. It seems that the Alaska and Delaware legislators may be willing to ignore what is fair to creditors in order to bring money into their states.(12) In fact, these legislators may be putting the interests of their respective states, as well as the interests of wealthy asset protectors, before the rights of creditors, previously held concepts of fairness, and what has been the prevailing law in this country. If estate planners and asset protectors elect to utilize trusts under these new statutes, Alaska and Delaware stand to be the depositories of massive amounts of wealth. This will translate into financial growth in each state through increased business among banks, attorneys, accountants, financial advisors, and any other professions that will assist clients in establishing and managing these trusts, the benefits of which will trickle down throughout each state's economy.(13)

    Since asset protection is the primary reason U.S. citizens create offshore trusts, Part II of this Note explains the goals behind asset protection and how the self-settled spendthrift trust works to achieve these goals. The policy implications of self-settled spendthrift trusts will be discussed, as well as the differences between U.S. law and that of foreign jurisdictions. Part III examines the background and the structure of the Alaska and Delaware statutes. Part IV discusses the effectiveness of the new Alaska and Delaware trusts as asset protectors. This Note concludes with an analysis of the significance of the shift in U.S. public policy and a determination that the Alaska and Delaware statutes do not represent good policy.

  2. THE SELF-SETTLED SPENDTHRIFT TRUST

    Prior to the passage of the Alaska and Delaware legislation, estate planners and asset protection experts generally agreed that offshore asset protection trusts provided optimum creditor protection.(14) Certain offshore jurisdictions provide such protection because their laws allow and enforce self-settled spendthrift trusts, which, until recently, were generally not enforceable under U.S. law. United States public policy and state law made it impossible for a settlor to expressly create a trust in which assets are completely protected against creditors while allowing the settlor to maintain control and enjoyment of the assets. The. Alaska and Delaware legislation attempts to change the existing law by allowing a settlor to create a trust which names the settlor as a beneficiary and includes a provision that protects the assets from the settlor's creditors, that will be enforced under their laws.(15)

    1. The Goal of Asset Protection and the Tools Used to Achieve It

      Individuals generally seek to accomplish one or more of the following goals when ordering their finances so as to provide for themselves and their families during life as well as upon death: estate planning, financial planning, and asset protection.(16) The main goal of estate planning is to ensure that upon a client's death his property passes smoothly and in accordance with his intentions to the people or entities that he wants to receive portions of his estate.(17) In addition, estate planning seeks to protect the estate from probate, a costly and time-consuming process, and to minimize tax liability.(18) Financial planning seeks to achieve a balance between risk and reward in order to maximize an estate's growth.(19) Asset protection planning alms to organize one's assets in such a way so as to safeguard them from loss that could otherwise result from their exposure to potential creditors.(20)

      Asset protection planning generally seeks to preserve and protect one's estate during one's lifetime as well as after death.(21) Interest in asset protection planning has increased as a result of the financial uncertainties facing a businessperson, a professional, an entrepreneur, or a property owner in the United States today.(22) Various economic and social factors have caused many financially successful people to feel their wealth is at risk, which has led them to utilize asset protection strategies to safeguard their wealth.(23) Expanding theories of legal liability,(24) result-oriented judges, juries willing to disregard precedent, unpredictably high damage awards, and the unavailability of adequate insurance coverage are some of the factors that have lead to an increased demand for asset protection planning.(25)

      Asset protection devices serve not only to protect a wealthy client's assets against an unfavorable judgment, but also to reduce the risk that a client will be sued in the first: place.(26) Successful professionals and any other high-net-worth individuals that appear to have deep pockets are often last resorts for plaintiffs looking to compensate a loss.(27) Some believe that wealth alone can be an incentive for claimants to file suits. Therefore, protecting one's assets can dissuade claims from being made and also provide incentive for settlements more favorable to a wealthy defendant.(28)

      There are many different methods that can be used to protect assets.(29) These methods offer varying degrees of protection from creditors. The amount of protection provided depends upon the device chosen, how it is structured, applicable state law, and the particular client's situation and goals.(30) Some of the various asset protection planning tools include limited partnerships and family limited partnerships,(31) custodial accounts, joint ownership of assets between spouses,(32) domestic trusts, offshore trusts, outright gifts, incorporating assets, and investment in tax exempt assets.(33) However, steps to protect assets must be taken, regardless of what device is employed, prior to the existence of any known or expected creditor or claimant.(34) Otherwise, the transfer may be deemed fraudulent and void with respect to creditors.(35)

    2. The Optimum Asset Protector--The Self-Settled Spendthrift Trust

      Transferring assets into a trust can have the primary or incidental effect of removing them from the reach of the settlor's creditors, thus protecting the assets.(36) Ensuring the financial security of the trust beneficiaries for the duration of the trust is a fundamental purpose of virtually all trusts.(37) There are many different types of trusts that offer varying degrees of asset protection.(38) However, there are certain protective mechanisms that are frequently incorporated into trust instruments in an effort to defeat creditor access to trust holdings.(39) A trust may contain a spendthrift or a forfeiture clause. Such clauses restrict a beneficiary's access to trust assets, which has the effect of also restricting...

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