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Domestic US Trusts

Alaska Self Settled Trust

Since April 1, 1997, Alaska has permitted self-settled trusts to be exempt from the reach of creditors.    The bill is intended to make Alaska a participant in the market for domestic asset protection and estate planning.  As with all domestic self-settled trusts, the question is as to whether domestic asset protection can provide comparable protection from the Full Faith and Credit Clause; in offshore asset protection, this is not the central issue.

The Traditional Domestic Treatment of Spendthrift Trust provides a clause in a trust restricting the beneficiary’s ability to voluntarily or involuntarily transfer his interest in the trust serves multiple purposes and is generally enforceable.  Many people in favor of spendthrift trusts feel that in the analysis, the beneficiary does not possess or control the trust and therefore the trust should hold up against creditors.  Proponents of the bill claim that state law is restricted from statues that are contrary to federal law.

Alaska was the first to pass a provision and statue for spendthrift trusts.  Before Alaska, all fifty states were opposed to spendthrift trusts or self-settled trusts.  As it stands, Alaskan law does allow debtors to protect against creditors by using self-settled trusts.

However, in federal law the Second Restatement of Trusts lays down the rule that is applied by nearly every jurisdiction.

(1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.

(2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount, which the trustee under the terms of the trust could pay to him or apply for his benefit. Thus, even where distributions to the settlor are at the discretion of the trustee, a creditor may reach the total amount that the settlor could receive from the trust. This amount could conceivably entail the entire trust.

The law has been well established in Alaska, but it is in its infancy in terms of being challenged.  While offshore jurisdiction have no responsibility to adhere to or follow US law, Alaska is within the federal US jurisdiction.  Alaska has not instituted the Uniform Fraudulent Conveyance Act or the Uniform Fraudulent Transfers Act and has not acknowledged or defined "badges of fraud" by statute, there is significant Alaska case history to encourage creditors to litigate such issues.

The primary effect of the Act was to rewrite Alaska Statutes section 34.40.110. The new statute permits the settlor of a trust to provide that “the interest of a beneficiary of the trust may not be either voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.  The statute makes no exception for cases in which the beneficiary in question is the settlor himself.

The act provides that a transfer restriction prevent anyone (expressly including present and future creditors) from satisfying a claim out of the beneficiary’s interest except under any of the following conditions.

(1) The transfer establishing the trust “was intended in whole or in part to hinder, delay, or defraud creditors or other persons.

(2) The trust permits the settlor to “revoke or terminate all or part of the trust without the consent of a person who has a substantial beneficial interest in the trust.

(3) The “trust requires that all or part of the trust’s income or principal, or both, must be distributed to the settlor.

(4) The settlor is in default of making a child support payment at the time of the transfer establishing the trust.

The above limits on the availability of an enforceable spendthrift provision are not absolutely defined and have not been challenged to any extent in the courts.

The statute also establishes a time limitation on actions brought under the act.  If the trust is operating as intended by the statute, it would theoretically protect both the out of state settlor and the Alaskan settlor and also serve to provide tax relief in estate planning, however the extent or degree of this protection is unknown.  Moreover, the outcome of an Alaskan residence upon the violation of the Fraudulent Conveyance Act also has yet to be determined.  In addition, it is unclear what will happen if the new rule against perpetuities is challenged with respect to land that is situated outside of the Alaska borders.

Where bankruptcy is involved, see In re Portnoy, 201 B.R. 685, 689 (Bankr. S.D.N.Y. 1986), the situation dramatically changes and the courts have been forced to make a priority decision of jurisdiction of the trust versus the jurisdiction of the filing of bankruptcy.  In Portnov, the priority was not in favor of the jurisdiction of the trust and the trust laws of that country, which was offshore, and creditors were allowed to attack property.  Many have speculated and analyzed that if it was Alaska in the case, certainly creditors would have been able to attack the trust.