Alaska Just Dinged Domestic Asset Protection Trusts

(Image credit: Ireneusz Skorupa - Ericsphotography)

Over 15 million lawsuits are filed in the U.S. each year, so protecting your assets from a financially ruinous lawsuit has never been more important. But one common way of doing that — a domestic asset protection trust (DAPT) — just took a big hit in court.

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Thanks to an Alaska Supreme Court ruling made on March 2, 2018, it’s become clear that if you are not a resident of the state under which you establish your DAPT, the DAPT may not be worth the paper it is written on.

The Tangwalls vs. the Wackers

The judgment stems from a series of lawsuits between two families, the Tangwalls and the Wackers, in Montana state court starting in 2007. Barbara and Donald Tangwall lost a lawsuit to the Wackers. But before any judgments were issued, Barbara Tangwall and her mother, Toni Bertran, transferred property assets to an Alaska DAPT to protect them. You see, Alaska was the first state to adopt what is commonly known as asset protection trust legislation. This was done to compete with the increase in overseas jurisdictions offering a special type of trust that protects assets placed inside from future, financially ruinous lawsuits.

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The Wackers then brought a fraudulent transfer case against the Tangwalls, Bertran and the trustees of the DAPT in Montana. They asserted that under Montana law the transfers were fraudulent. The Montana court agreed and set the transfers aside.

Before William Wacker could get his hands on the property, Bertran filed for Chapter 7 bankruptcy in Alaska. By filing for bankruptcy in Alaska, she brought the trust property under the jurisdiction of the Alaska Bankruptcy court, but she didn’t get far. The bankruptcy trustee subsequently successfully filed a fraudulent transfer action under §548 of the Bankruptcy Code.

The transfers to the DAPT had now been declared void by two courts.

Seeking refuge in Alaska, but failing

Donald Tangwall’s answer was to bring a suit in Alaska, seeking to have the Montana and federal judgments set aside under Alaska law.

The Alaska Supreme Court analyzed allegations of fraudulent transfer through the lens of AS § 34.40.110(k), which provides that Alaska courts have “exclusive jurisdiction” over all actions involving transfers to Alaska DAPTs. The ultimate question was, “Can Alaska compel federal courts or the courts of its sister states to recognize its declaration that questions involving Alaska DAPTs be solely heard by Alaska courts?” The Alaska Supreme Court held that it could not.

The court ruled that the Full Faith and Credit Clause of the U.S. Constitution does not require states to follow other states’ statutes claiming exclusive jurisdiction. It further found that, due to the Supremacy Clause of the Constitution, states cannot restrict federal jurisdiction, even in cases where the state itself created the right being litigated.

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The Takeaway

The protections of state domestic asset protection trusts have always come with caveats. We didn’t know for sure whether they would actually work. Full faith and credit as between the states, along with supremacy of federal laws both were potential threats to any state’s asset protection laws.

The question of whether they’d work appears to have been answered by the Alaska Supreme Court. If you are not a resident of the state under which you establish your DAPT, unless the time within which a creditor may file a fraudulent transfer lawsuit has expired, the DAPT may not stand up.

2 Solutions to Consider

Foreign Asset Protection Trusts

So, if the DAPT is not an option, what can one do? Consider a foreign asset protection trust. The FAPT protects your assets without the major flaw of the domestic asset protection trust. Simply stated, a U.S. court having no jurisdiction over the trustee or the trust property may not enforce a judgment against a FAPT.

FAPTs are “battle tested” and have held up for decades as the most protective form of asset protection trusts that exists.

Overseas Asset Protection Trusts

Another option is to form your asset protection trust overseas, and when the statute of limitations for fraudulent transfers in your non-DAPT state expires, redomicile your trust to a DAPT state. This should eliminate the risks illuminated by the Alaska case that was just decided.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jeffrey M. Verdon, Esq. is the lead asset protection and tax partner at the national full-service law firm of Falcon Rappaport & Berkman. With more than 30 years of experience in designing and implementing integrated estate planning and asset protection structures, Mr. Verdon serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives. Over the past four years, he has contributed 25 articles to the Kiplinger Building Wealth online platform.