In 1998, despite arguments that the concept of an asset protection trust conflicted with US public policy, Alaska passed its own asset protection trust statute. This was steadily followed by 15 additional states. These jurisdictions decided that asset protection IS good public policy; that it is legal and proper for individuals to take measures to protect their wealth from unknown future creditors and predators. Asset protection is a legal and worthy objective, provided “fraudulent transfer” is not pursued by a debtor acting with the intention to delay, hinder or defraud a known creditor.
Domestic asset protection trusts come with the benefits of lower maintenance costs, local trustees, reduced tax filings, fewer federal disclosure forms, and a reduced perception of impropriety. However, several cases have moved through US courts to reveal the Achilles heel of domestic asset protection trusts which originates in Article IV, Section 1 of the US Constitution, which states:
“Full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state.”
In other words, a judgment in one state must be honored by all other states. In stark contrast, Offshore Trusts are prohibited from recognizing foreign judgments. Results-oriented U.S. judges have broken domestic trusts several times.
Courts in one state will apply local law instead of the stated law of the trust, thereby neutering the domestic trust’s effectiveness. A trust that is a steel box in one state can quickly become a wet paper bag in another.
Unfortunately, the short history of domestic asset protection trusts seems to indicate that they should not be relied upon because they have proven to be ineffective when seriously challenged by capricious and unpredictable US courts.
Learn about the concepts of a Trust, Irrevocability, Spendthrift Provisions and much more.