Will the Alaska Trusts Work? Leslie C

JOURNAL OF ASSET PROTECTION September / October 1997 Will the Alaska Trusts Work? Leslie C. Giordani and Duncan E. Osborne Those contemplating establishing an Alaska asset protection trust based on that state’s new statute should first consider the impediments to effective asset protection in Alaska, both those intrinsic to Alaska’s statehood and those in the new Alaska law. mandate in the Constitution,1 Alaska courts hen a prospective settlor of an must recognize judgments rendered under Wasset protection trust evaluates the laws of less debtor-friendly states. In various jurisdictions to determine addition, the enactment of laws enabling the best location for the trust, one asset protection trusts may itself violate the consideration is paramount: the level of Constitution’s contract clause.2 Finally, due shelter from creditors’ claims. Issues such as to the supremacy clause3 of the Constitution, physical proximity, cultural comfort, and the Alaska statute cannot protect debtors familiarity with the local legal system from conflicting federal law (in this case, become important only after the desired bankruptcy law). Even if the legislation level of protection is reached. Thus, the passes constitutional muster, however, it settlor (or the settlor’s advisor) must focus does not necessarily protect an asset on the legal tools a creditor can use to attack protection trust from some of the arguments a trust and must determine the available to a creditor through existing corresponding defenses each jurisdiction Alaska law. provides. The most successful asset The new statute, existing statutory protection jurisdictions have erected legal provisions, and Alaska common law provide barriers that all but eliminate the creditor’s various opportunities for a sympathetic arsenal. court, whether in Alaska or elsewhere, to set Alaska has recently enacted sweeping aside or penetrate the trust structure in favor legislation with a view toward becoming a of creditors. viable venue for establishing asset This article will discuss the potential protection trusts. However, Alaska faces problems with Alaska asset protection trusts, some major hurdles in its bid to become a both those intrinsic to Alaska’s statehood major player in the asset protection and those not otherwise resolved by the new community. By its very nature, Alaska legislation. The analysis assumes that an cannot be as protective a site for establishing Alaska trust will not have significant assets trusts as an offshore jurisdiction because or administration offshore. Otherwise, the Alaska is a part of the United States and is trust would be better characterized as an therefore bound by the U.S. Constitution. offshore trust with an Alaskan backdrop, First, by virtue of the “full faith and credit” garnering its principal protective features Leslie C. Giordani, Esq., and Duncan E. Osborne, Esq., are partners in the law firm of Osborne, Lowe, Helman & Smith, LLP, in Austin, Texas. Mr. Osborne and Ms. Giordani are the editor and assistant editor, respectively, of the four-volume treatise, Asset Protection: Domestic and International Law and Tactics (Clark Boardman Callaghan). The authors gratefully acknowledge the research assistance of Paul E. Williams, Esq., an associate at the firm. ©1997 Leslie C. Giordani and Duncan E. Osborne. All rights reserved. from the fact that its assets and trusteeship created and funded, the creditor must are not within the United States. proceed in a court that has jurisdiction over some aspect of the trust. If the trust is an Alaska trust, this does not necessarily mean an Alaska court. Another state’s court may Full Faith and Credit Issues have jurisdiction over the trustee, the settlor, or the trust assets. If a judgment creditor of a settlor of an asset A court could have jurisdiction over protection trust wants to pursue trust assets the trustee or settlor in a number of ways: in a post-judgment enforcement action, the creditor ultimately must involve a court that • Individuals are always subject to the 4 has jurisdiction over the trust assets or over jurisdiction of courts within their domiciles. a party in control of the trust assets. In the Generally, this means that a non-Alaska case of a trust created offshore, this post- trustee or settlor is subject to the jurisdiction judgment enforcement action is problematic of his or her home state’s courts. Jurisdiction because the offshore jurisdictions that are may also exist under the long-arm statute if favorable asset protection trust venues do the trustee or settlor has sufficient contacts 5 not have laws that permit the recognition with the forum state. and enforcement of U.S. judgments. This • Corporations are subject to the generally means retrying the original case on jurisdiction of the courts in the state of their 6 the merits and then bringing a post-judgment incorporation. They are also subject to the enforcement action to reach trust assets in jurisdiction of courts in any state in which 7 the jurisdiction where trust assets or the they do business. For large corporate trustee is located, a task that typically is trustees such as banks, including those based extremely difficult, if not practically or with offices in Alaska, this could impossible, due to procedural and financial effectively give jurisdiction to the courts of hurdles. many states. However, in the United States, that • A state’s courts also will have task is much more manageable, primarily jurisdiction over all property within the 8 because of the full faith and credit clause of state’s borders. This includes real property, the U.S. Constitution. Under the right bank and brokerage accounts, and shares of circumstances, the assets of an Alaska trust stock issued by corporations incorporated in 9 could be reached by a creditor who never that state. If a trust holds stock in many even sets foot in an Alaska court. More different corporations, its property may be likely, however, the assets could be reached subject to the jurisdiction of several state’s by a creditor who appears in an Alaska court courts. Furthermore, any non-Alaska on a pro forma basis to have the court activities in which the trust participates will enforce a judgment rendered by the court of likely involve the maintenance of accounts another state. As will be shown, this ability outside Alaska, which would become targets of creditors to sue effectively outside Alaska of creditors seeking to pursue their claims obviates some of the protection the drafters outside of the Alaska courts. of Alaska’s new statute intended to provide. The mere fact that a non-Alaska Jurisdiction. In order for a judgment court has jurisdiction to hear a creditor’s creditor of the settlor to enforce a judgment post-judgment enforcement action does not against assets of a trust that the settlor has guarantee a creditor victory. The creditor 2 must also advance an argument that or case law to the effect that self-settled convinces the court that it should enforce the discretionary trusts are void with respect to underlying judgment on the merits against creditors’ claims for public policy reasons.12 the assets of the judgment debtor’s Alaska Therefore, all assets of such a trust that are asset protection trust. A judgment creditor’s subject to the settlor’s ability to receive arguments typically will fall into one or discretionary distributions are also fully more of the following categories, which reachable by the settlor’s creditors. might be pled individually or in the Thus, if the non-Alaska court decides alternative: (1) the Alaska trust’s asset that this rule is a sufficiently strong tenet of protection features offend public policy in its state’s public policy, the court may the state where the post-judgment action is decide to ignore the Alaska provisions in brought and, therefore, the governing law of favor of its own and declare the trust assets the trust (Alaska law) should be ignored in reachable by creditors, thereby eliminating favor of the law of such state; (2) the the protection the trust was designed to settlor’s conveyance to the Alaska trust was achieve. a fraudulent conveyance and, therefore, should be set aside; or (3) the Alaska trust is Sham or Alter Ego. The non-Alaska court a “sham” trust or is the alter ego of the could apply Alaska law and nonetheless settlor and, therefore, because the settlor invalidate the trust on the basis that it is a never really parted with dominion and “sham” or the alter ego of the settlor. control over the trust assets, the court should Because many of these trusts will be used disregard the trust structure. chiefly to provide asset protection, the settlor will be the primary (or only) Governing Law. A court that has beneficiary. He or she may also be a co- determined that its jurisdiction is proper trustee, a protector, or otherwise retain must decide whether to apply its own state’s significant control over the trust. A court law or the governing law of the trust (that is, faced with these facts might be very Alaska law). The general rule for trusts is receptive to an argument that the settlor is that courts will apply the governing law of not really a “discretionary” beneficiary, as the trust.10 However, there is an exception to Alaska law requires.13 Moreover, pursuant this rule. If the state where a court exercises to a pattern of behavior revealing a jurisdiction has a sufficiently strong public relationship between the trustee and settlor policy against a pertinent provision of the suggesting that the settlor did not, in fact, governing law of the trust, the court will part with dominion and control over the trust ignore the governing law provision of the assets, the creditor might persuade a court to trust agreement and substitute its state’s law disregard the trust structure because it is a to resolve the matter before the court.11 sham or the alter ego of the settlor.

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