The Use and Abuse of Governing-Law Clauses in Trusts: What Should the New Restatement Say?

• Author: Thomas P. Gallanis
• Position: Associate Dean for Research and Allan D. Vestal Chair in Law, University of Iowa
• Pages: 1711-1727

1711

The Use and Abuse of Governing-Law

Clauses in Trusts:

What Should the New Restatement Say?

Thomas P. Gallanis*

ABSTRACT: This Essay offers a novel solution to a thorny problem at the

intersection of trust law and the conflict of laws: When should the settlor be

able to choose a governing law other than the law of the jurisdiction with the

most significant relationship to the trust? The law of the conflict of laws gives

effect to a governing-law clause in a trust instrument except when contrary to

the “strong public policy” of the jurisdiction with the most significant

relationship to the matter at issue. But what is “strong public policy”? The

answer should not depend on the size of the Chancellor’s foot. This Essay

proposes, instead, that the answer should incorporate the well-established

distinction between the default rules of trust law, which aim to effectuate the

intention of the typical settlor but yield to a particular settlor’s contrary

intention, and the mandatory rules of trust law, which apply without regard

to intention for reasons of overriding public policy. This Essay proposes that

a governing-law clause in a trust instrument should be effective unless

contrary to the mandatory law of the jurisdiction with the most significant

relationship to the matter at issue. The Essay urges the adoption of this

approach by the Restatement (Third) of the Conflict of Laws, which is

currently in the process of being drafted.

*

Allan D. Vestal Chair in Law and Associate Dean for Research, University of Iowa. I am

grateful for feedback from my colleague Jonathan Carlson and from participants at a July 2017

conference on “The Use and Abuse of Trusts and Other Wealth Management Devices” held at

the Singapore Supreme Court and co-sponsored by the Singapore Academy of Law, the

Singapore Management University, and the University of York. It is also a pleasure to thank my

student research assistants: Ejulius Adorno, Ian Kinghorn, Theodore Ovrom, Brandon Pakkebier,

and Grant Simmons.

Disclosure: I served as an associate reporter for the Restatement (Third) of Trusts and currently

serve as executive director of the Uniform Law Commission’s Joint Editorial Board on Uniform

Trust and Estate Acts. However, I emphasize that the views in this Essay are mine alone. I am not

speaking for the American Law Institute or the Uniform Law Commission.

1712 IOWA LAW REVIEW [Vol. 103:1711

I. INTRODUCTION ........................................................................... 1712

II.THE RESTATEMENTS OF THE CONFLICT OF LAWS ....................... 1713

III. TRUSTS AND THE EFFECT OF A GOVERNING-LAW CLAUSE:

A NEW APPROACH ....................................................................... 1716

IV.CONCLUSION .............................................................................. 1723

APPENDIX A: THE SECOND RESTATEMENT ON THE EFFECT OF A

GOVERNING-LAW CLAUSE ........................................................... 1724

APPENDIX B: UNIFORM TRUST CODE SECTION 107(1) AND

ITS VARIATIONS ........................................................................... 1726

I. INTRODUCTION

Donald Huber, a real estate developer from the state of Washington,

created a trust to protect his assets from creditors.1 The trust instrument

contained a provision designating the law of Alaska as the governing law.2

Alaska authorizes the asset protection trust,3 whereas Washington does not.4

Three years later, Huber filed for bankruptcy.5 In the bankruptcy proceeding,

the question arose whether the trust should be invalidated.6 The court

determined that the state with the most significant relationship to the trust,

and therefore the state with the relevant substantive law, was Washington:

Huber—who was the trust’s creator (“settlor”) and also one of the trustees—

was domiciled in Washington and so were the beneficiaries.7 Moreover, the

trust assets, before they were transferred into the asset protection trust, were

located there.8 The connection to Alaska was that it was the location of a

corporate co-trustee, and it was the state where the trust was to be

administered; the court determined that these factors gave Alaska “only a

minimal relation” to the trust.9 The question then was: What should be the

effect of the governing-law clause? The court held that the governing-law

clause should be disregarded because it was an attempt to circumvent the law

and the public policy of the state with the most significant relationship to the

1. In re Huber, 493 B.R. 798, 804–05 (Bankr. W.D. Wash. 2013).

2. See id. at 807.

3. See ALASKA STAT. § 34.40.110 (2016).

4. See WASH. REV. CODE § 19.36.020 (2016).

5. In re Huber, 493 B.R. at 806.

6. Id. at 807.

7. Id. at 808–09.

8. Id.

9. Id. at 809.