FAKE NEWS OF THE DEMISE OF DOMESTIC ASSET PROTECTION TRUSTS: Takeaways From Toni 1 Trust v. Wacker (2018)

BAD FACTS

Good fences make good neighbors, except in Montana. Donald Tangwall and William Wacker, both residents of Montana, were not good neighbors. Tangwall sued Wacker in 2007.  Wacker then counter-sued Tangwall, which started a legal war that would last over ten years.

Wacker won the first battle and obtained a significant money judgment against Tangwall in Montana state court (“Judgment 1”). Judgment 1 was also against Tangwall’s mother-in-law, Toni Bertran. In a fit of panic as Judgment 1 was being rendered, Toni Bertran transferred most of her assets to a Domestic Asset Protection Trust (“DAPT”) sitused in Alaska (the “Toni 1 Trust”) and named herself as the beneficiary.

When it was time to collect Judgment 1, Wacker promptly and predictably filed an action to set aside Toni’s transfer to the Toni 1 Trust, because it was fraudulent! It was clear that Toni Bertran sought to avoid Judgment 1, so the Montana state court set aside the transfer as fraudulent (“Judgment 2”) because the purpose was to “hinder, delay or defraud a creditor.”

Now faced with two (2) judgments, Toni Bertran filed for bankruptcy protection in the State of Alaska. The bankruptcy trustee then filed its own fraudulent conveyance action to set aside Toni’s transfer to the Toni 1 Trust.  The Bankruptcy Court predictably reached the same result as the Montana state court and, again, set aside the transfer as fraudulent (“Judgment 3”).

With three (3) adverse judgments closing in and only one strategic bullet left, Toni Bertran went on the offensive and filed suit in Alaska to annul both the Montana and Bankruptcy court judgments (Judgments 2 and 3).

MAKE BAD LAW

Toni Bertran argued that the Montana state court and Bankruptcy courts lacked jurisdiction to render Judgments 2 and 3, which was actually a good argument because Alaska Statute (AS) 34.40.110(k) specifically states that Alaska has exclusive jurisdiction over any fraudulent conveyance action involving an Alaska trust. The question for the Alaska court was whether this statute is enforceable. (Note many statutes exist that simply are unenforceable.  E.g., Mustaches are illegal in Indiana if the bearer has a tendency to kiss other humans.)

This is not the first time a state has attempted to limit the reach (jurisdiction) of other states. However, the United States Constitution forbids it. States must give Full Faith and Credit to judgments rendered by sister states, provided the sister State otherwise has proper jurisdiction.

The Alaska Supreme Court correctly ruled in Toni 1 Trust v. Wacker, 2018 WL 1125033 (Alaska March 2, 2018), that Alaska does not have exclusive jurisdiction over fraudulent conveyance actions involving Alaska trusts if another state has proper jurisdiction. Both Judgment 2 and Judgment 3 were correctly recognized as valid.

THE BOTTOM LINE

What does this mean for Louisiana residents? In a nutshell, the Toni 1 Trust v. Wacker decision holds that any state with a fraudulent conveyance act and proper jurisdiction can invalidate a fraudulent transfer no matter where a trust (or other recipient) may be situated.

THE TAKEAWAY

Some legal pundits have lauded Toni 1 Trust v. Wacker as “the last nail in the DAPT coffin.”  This is not accurate – The DAPT is still very much alive and well!  In fact, to date there has not been a single case allowing a creditor to reach assets transferred to a DAPT – unless the transfer itself is deemed fraudulent!

Takeaway One:  Self-settled DAPTs vs “Hybrid” Alaska DAPTs.

Alaska trusts offer many benefits when properly structured.  Comparatively, the Alaska trust code offers modern conveniences and features that simply cannot be achieved under Louisiana law — and is the most protective body of law that exists in the United States.

That being said, if asset protection is a goal, the key in Louisiana is to avoid self-settled trust status, which simply means the creator of the trust (wherever sitused) should not also be a beneficiary. IF YOU ESTABLISH A TRUST AND DO NOT RESIDE IN A DAPT JURISDICTION, DON’T NAME YOURSELF AS A BENEFICIARY IF ASSET PROTECTION IS A GOAL!

Conversely, a “Hybrid” Alaska DAPT allows a third party, such as a trust protector, to add or remove any beneficiary, including the settlor. Unless and until the settlor is added as a beneficiary, a “Hybrid” Alaska DAPT trust is deemed a third-party trust and, if properly structured, is not susceptible to an attack from creditors in any jurisdiction (absent a fraudulent transfer). As such, a Hybrid Alaska DAPT represents a very safe and secure asset protection option for Louisiana residents.

Takeaway Two:  Act in ADVANCE!

Asset protection planning is like a vaccine.  It works best when administered in advance.  Transfers made to a trust after a judgment is rendered can be set aside in any jurisdiction (even Alaska) when the intent is to hinder, delay or defraud a creditor.  Toni 1 Trust v. Wacker is case in point!

Conversely, a transfer that occurs before a problem exists, as part of an integrated estate plan, is not fraudulent.  The time to act is before a problem arises – when the seas are calm!

Takeaway Three: Keep calm and carry on.   

Asset protection planning is NOT about (1) defrauding or avoiding known creditors; (2) avoiding liabilities; (3) reliance on privacy or secrecy laws; (4) hiding assets; or (5) a means for fraudulent transfers.  It is simply the process of organizing one’s assets and affairs in advance as part of an estate or business plan to safeguard against risks.

Keep calm, don’t make fraudulent transfers, and carry on.

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