The Supreme Court of Alaska did not destroy the utility of domestic asset protection trusts (DAPTs) in its decision in Toni 1 Trust v. Wacker – but their usefulness has always been subject to some sharp limitations, especially when the settlor (creator) of the trust is subject to a cause of action (the event for which the settlor is being sued), such as a fraudulent transfer action, that was not derived under the law of the state in which the DAPT was created.

As you will see from reading the details below, the takeaway here is that if a fraudulent transfer cause of action occurs outside of the jurisdiction of the state in which the DAPT is created or if such cause of action or its remedy is actionable under federal law, the court can virtually ignore the laws of the DAPT state’s jurisdiction.

In this case, certain members of the Tangwall family lost a countersuit in Montana and then tried to transfer some assets to an Alaska DAPT. The Wackers then brought a fraudulent transfer action in the Montana court. The trustee of the DAPT defended against any remedy action being taken against the DAPT by asking the Alaska court to rule that the Montana actions and attempts to claw back fraudulent transfers from the Alaska DAPT had no bearing here because Alaska has the exclusive jurisdiction over matters affecting an Alaska DAPT’s assets.

One of the Tangwall family members who was involved with transfers to the DAPT decided to file in Alaska for Chapter 7 federal bankruptcy “protection.” That move then allowed the bankruptcy trustee to get involved by bringing a collection action against the DAPT trustee in the federal bankruptcy court. The DAPT trustee argued that since Alaska has exclusive jurisdiction over this matter, Alaska law generally prohibits a DAPT trustee from making any assignment of trust assets to a creditor. Even if the funding of the trust did involve fraudulent transfers, the action had not been brought within the statute of limitations period allowed under Alaska law, and therefore the creditors were too late and forever barred from mandating the DAPT trustee to assign any trust assets to the creditors. The Alaska Supreme Court ruled however that Montana courts do not need to give full faith and credit to Alaska’s law with regard to what remedies may be available to the creditor against the Alaska DAPT.

This particular decision further confirms that Alaska (or any state) cannot limit the jurisdiction of any other state when it comes to actions that are “transitory” – and fraudulent transfers are indeed transitory. A Delaware state court (which did not involve fraudulent transfers, but instead involved a divorcing spouse’s right to DAPT assets) recently decided the same thing, and both Alaska and Delaware cited a well-established case from 1914 in their decisions, so that subtlety of state law is not likely to change.

This is bad news for DAPTs because if the settlor of one of these trusts does not live in the state in which it was created, or can in any way be subject to the jurisdiction of a court from a state that does not have DAPT legislation, then the trust is vulnerable to creditors in fraudulent transfer and other cases.

Foreign asset protection trusts (FAPTs), on the other hand, are safer from US court decisions because they are completely under the jurisdiction of whatever country they are in, though it is safer still for a settlor to limit his or her role in the trust to that of being only a “discretionary beneficiary,” or not to be a beneficiary at all. In fact, a FAPT moves from the “somewhat protective” mode to the “more protective” mode as it reduces the level of U.S. assets that it holds, and the more it cuts back the settlor’s control and retained benefits. Though no option is entirely without risk, foreign asset protection trusts can be far more secure than domestic asset protection trusts.