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Gray's Ghost—A Conversation About the Onshore Trust Karen E

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Gray's Ghost—A Conversation About the Onshore Trust Karen E University of Washington School of Law UW Law Digital Commons Articles Faculty Publications 2000 Gray's Ghost—A Conversation About the Onshore Trust Karen E. Boxx University of Washington School of Law Follow this and additional works at: https://digitalcommons.law.uw.edu/faculty-articles Part of the Estates and Trusts Commons Recommended Citation Karen E. Boxx, Gray's Ghost—A Conversation About the Onshore Trust, 85 Iowa L. Rev. 1195 (2000), https://digitalcommons.law.uw.edu/faculty-articles/179 This Article is brought to you for free and open access by the Faculty Publications at UW Law Digital Commons. It has been accepted for inclusion in Articles by an authorized administrator of UW Law Digital Commons. For more information, please contact [email protected]. Gray's Ghost-A Conversation About the Onshore Trust Karen E. Boxx* I. INTRODUCTION ......................................................................... 1197 II. THEAMERICAN LAW OF SPENDTHRIFT TRUSTS AND THE RECENT STATUTORY DEPARTURES ............................................................ 1201 A. THE SPENDTHRIFTTRUST ..................................................... 1201 B. ALAsKA'SSEcTIoN110 ........................................................... 1204 C. DELAWARE'S PROVISION ......................................................... 1206 D. N EVADA ................................................................................. 1207 E. RHODEISLAND ...................................................................... 1208 F. COMPARISON OF THE STATUTES .............................................. 1208 III. STATE COURT CHALLENGES ....................................................... 1208 A. FULL FAITH AND CREDIT CLA USE ANDJURISDICTIONAL ISSUES .................................................................................... 1208 1. Personal Jurisdiction Over the Trustee ........................ 1210 2. The Finality of a Finding of Personal Jurisdiction .................................................................. 1213 3. The Trustee as a Necessary Party to the Litigation ..................................................................... 1216 4. Choice of Law Issues .................................................... 1221 B. FRAUDULENT CONVEYANCE CHALLENGE .................................. 1221 C. CONTEMPT............................................................................ 1225 D. SUMMARY ............................................................................. 1226 IV. BANKRUFrCY ............................................................................. 1227 V. CONTRACT CLAUSE CHALLENGE ................................................ 1230 A. WHETHER THEALASKA LEGISLATION ISA SUBSTANTIAL IMPAIRMENT OFEXISTING CONTRACTS ................................... 1231 1. Effect on Existing Contracts ......................................... 1231 2. Impairment of Contract or Remedy ............................ 1234 • Assistant Professor of Law, University of Washington. I gratefully acknowledge the valuable comments and assistance of Professor Thomas Andrews, Todd Maybrown, and Kath- leen Kim Coghlan. 1195 1196 85 IOWA LAWREVIEW [2000] B. DETERMINING WHETHER A SUBSTANTIAL IMPAIRMENT IS NEVERTHELESSJUSTIFIABLE ............................................... 1236 C. EFFECT OFA SUCCESSFUL CONTRACT CLAUSE CLAIM ................ 1239 D. SUMMARY ............................................................................. 1240 VI. ESTATEAND GIFrTAx ISSUES .................................................... 1241 VII. POLICY DISCUSSION ................................................................... 1251 A. ARGUMENTS SUPPORTINGSELF-SETTLED SPENDTHRIFT TRUSTS ................................................................................. 1252 B. RESPONSES TO THEARGUMENTS FAVORING SELF- SETTLED SPENDTHRIFTTRUSTS ............................................. 1256 C. THE POLICYARGUMENTS AGAINST SELF-SETTLED SPENDTHRIFTTRUSTS ........................................................... 1259 VIII. CONCLUSION ............................................................................ 1261 APPENDIX-PERTINENT ALASKA STATUTES GOVERNING SELF-SETTLED SPENDTHRIFr TRUSTS ........................................................................ 1262 GRAYS GHOST 1197 My modest task has been to show, that spendthrift trusts have no place in the system of the Common Law. But I am no prophet, and certainly do not mean to deny that they may be in entire harmony with the Social Code of the next century. Dirt is only matter out of place; and what is a blot on the escutcheon of the1 Common Law may be ajewel in the crown of the Social Republic. As spendthrift trusts gained recognition at the turn of the nineteenth century, their primary foe, John Chipman Gray,2 acknowledged defeat without surrendering his objections. Courts and commentators overrode Professor Gray's concerns without ever addressing them directly.' Now at the beginning of the twenty-first century, we are faced once again with the debate as certain states are extending spendthrift trust protection to a grantor's interest in a trust. Four states-Alaska, Delaware, Nevada, and Rhode Island-now statutorily authorize self-settled spendthrift trusts.4 This dramatic extension of the doctrine raises issues of whether these pro- tections will, in fact, prove effective and revives many of Professor Gray's concerns about the place in the U.S. legal system for such trusts. I. INTRODUCTION A trust is an arrangement whereby one person (the trustor)5 transfers property to another person (the trustee) and directs the trustee to hold the property for the benefit of another person (the beneficiary). 6 Multiple per- sons may fill each role; for example, there can be several beneficiaries or co-trustees. One person may play several of these roles; for example, the trustor may also serve as trustee or may be a beneficiary of the trust. How- I. JOHN CHIPMAN GRAY, RESTRAINTS ON THE ALIENATION OF PROPERTY x (2d ed. 1895). 2. Professor Gray (1839-1915) was on the faculty of Harvard Law School for nearly 40 years and was, at the time of retirement, the Royall Professor of Law, a position he held for 29 years. He continued practicing law while on the faculty, in one instance working on a suit involving Benjamin Franklin's Will. His published works included: Restraints on the Alienation of Property (1883, which was also published ina second ed. in 1895); The Rule Against Perpetuilies (1886), which is recognized as the standard authority on the Rule both in the United States and Great Britain; and Select Cases and other Authorities on the Law of Property, which was pub- lished in six volumes from 1888-1892. VII Dictiona7y ofAmerican Biography (Fraunces-Grimke) (A.Johnson & D. Malone eds., 1931). 3. Anne S. Emmanuel, Spendthrift Trusts: It's Time to Codfyi the Compromise, 72 NEB. L REV. 179, 194, 209 (1993). 4. See ALASKA STAT. § 34.40.110 (Lexis 1998); DEL CODE ANN. tit. 12, § 3571 (Supp. 1998); NEV. REV. STAT. § 166.040(1)(b) (1999); R.I. GEN. LAWS § 18-9.2-2 to 18-9.2-5 (1999). As used in this Article, the term "self-settled trust" refers to a trust set up for one's own benefit, i.e., where the settlor has retained a beneficial interest. 5. A trustor, or settlor, is the person who establishes the trust and transfers his or her property into the trust. The terms "settlor" and "trustor" are used interchangeably. 1 AUSTIN W. ScoTr, TRUSTS § 3 (William Franklin Fratcher ed., 4th ed. 1987) [hereinafter ScoTr]. The term "grantor" is also frequently used to describe the person who sets up the trust. BLACK'S LAW DIcrIONARY 700 (6th ed. 1990). 6. MARK REUTLINGER, WILLS, TRUSTS, AND ESTATES: ESSENTIAL TERMS AND CONCEPTS 157 (2d ed. 1998). 1198 85 IOWA IAWREVIEW [2000] ever, if the same person plays all three roles alone, then no trust is created.7 A self-settled trust is a trust that a person settles, or establishes, for his own benefit-a trust where the trustor is also a beneficiary. A spendthrift trust is a trust that includes a provision either prohibiting the beneficiary's credi- tors from reaching the beneficiary's interest in the trust (an involuntary transfer) or prohibiting the beneficiary from assigning his or her interest to a third party (a voluntary restraint).8 A self-settled spendthrift trust is, therefore, an arrangement where the trustor names herself as a beneficiary and includes a spendthrift provision that protects the trustor's interest in the trust from the trustor's creditors. A hypothetical situation demonstrates why scholars are concerned with self-settled spendthrift trusts. Imagine a tragic automobile accident in Washington state caused by a drunk driver, Debra Diversified ("DD"), who is known for her wild ways but whom police have not previously arrested for driving while intoxicated. A young single mother, Polly Taft ("PT'), is ren- dered a quadriplegic. PT sues DD in Washington state court because both PT and DD are Washington state residents. PT obtains a $15 million judg- ment against DD, who has minimal insurance coverage but, at thirty-five years old, is a retired "dot-com" millionaire. When PT tries to enforce her judgment, however, she discovers that DD has transferred all of those dot- com millions into a trust with an Alaskan trust company. DD is a beneficiary of the trust, and the trust pays all of her expenses. The trust contains a spendthrift clause, which provides that DD's creditors cannot reach the assets in the trust even though she is a beneficiary. Alaska law, contrary to the
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