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Domestic Asset Protection Trusts

By John Dietz - Email Editor

Date: June 13, 2006

Dear Subscriber:

In 1997 Alaska became the first state to pass a statute allowing Self-Settled Asset Protection Trusts. This was a big revision and considered a paradigm shift in the industry. What would cause Alaska of all places to be a front runner of such change? Remember the axiom: If you follow the story, it's interesting; but if you follow the money, you will find out what's really going on. The reality is in the last 10 years billions of dollars have traveled to offshore jurisdictions. The reason is simple: Money goes where it's treated the best, and in this case, it's Asset Protection and investment choices.

When you set up an Asset Protection Trust for yourself it must have a spendthrift clause. This prevents the beneficiary of the Trust from voluntarily or involuntarily transferring any current or future rights in the Trust. In other words, the clause prevents the creditors of the beneficiary from reaching the Trust's assets.

The term "Self-Settled Spendthrift Trust" refers to a Trust with a spendthrift clause where the settlor is also a beneficiary.

The only impediment to using such a Trust has been the fact that until 1997 every state (with relatively minor exceptions) has provided that a spendthrift clause in a Self-Settled Trust is invalid. It is against public policy for an individual to put property into a Trust and out of the reach of his or her creditors when the individual still can benefit from the property.

During 1997, Delaware along with Alaska modified their Trust statutes to legalize a spendthrift clause in Self-Settled Trusts. This was a significant change. Before 1997, the only effective way to create a Self-Settled Spendthrift Trust was to form it offshore.

This is starting to sound good…no more fussing with offshore jurisdictions. But, hold on, what are we missing?… Oh yes, article IV of the U.S. Constitution.

Section 1. Full faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records, and Proceedings shall be proved, and the Effect thereof.

Commonly known as the Full Faith and Credit Clause of the Constitution, it says that each state will recognize, honor and enforce one another's actions. It is primarily intended to provide for the continuity of states and enforcement across state lines of non-federal laws, civil claims and court rulings.

The reality is the effectiveness of both Delaware and Alaska remain dubious at best. The first reason is the Constitution; the second is that we don't know what a U.S. judge will do.

As always, stick to the tried and true methods of protecting your assets. There is a reason that billions of dollars are in time tested structures: They work!

Until next time,

John

 

 

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