The Full Faith and Credit Clause is found at Article IV, Section 1 of the U.S. Constitution. It states:
Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.
In other words, the various states are supposed to work together and respect each other’s laws. After all, we are supposedly the United States. How this “Full Faith and Credit” stuff works in real life has been hotly debated in the courts.
In the recent Wacker case, the Alaska Supreme Court held that the law of the residence of a man who set up an Alaska trust and conveyed assets to it for the alleged purpose of avoiding creditors would apply, instead of Alaska law, for determining whether the transfer to the trust would be set aside because it was for the express purpose of avoiding payment to a specific and imminent creditor.
For existing DAPTs, consideration of having a trust protector modify the trust, or transferring (decanting) the trust, into a different/new trust that names an offshore trust company as the successor trustee (my preference) may be worthwhile. Having a foreign trustee named would convert the trust into a “foreign asset protection trust.” A major advantage of this would be that there would no longer be a Full Faith and Credit Clause issue. Why? Because foreign countries do not recognize U.S. judgments.
Also, with a foreign asset protection trust, there would no longer be a Conflict of Law issue. A court in a state that does not have a law allowing domestic asset protection trusts (for example, Arizona) could decide not to honor the terms of a Delaware asset protection trust. But a court in the Cook Islands or Nevis would simply not look to any U.S. state law. Thus, there would be no conflict of laws.
I now favor naming an offshore trust company as a successor trustee. The downside of this is that the trust company will charge approximately $5,000 per year. The upside is that the assets would be off limits to any creditor. Think of it as being able to pull up the drawbridge and lower the iron gate to your castle if you ever need to. In all instances, greater care in the planning and administration of such trusts may be warranted. Obviously, modifications to existing DAPTs and the structures associated with them might make them safer.
To avoid the immediate cost of using a foreign trustee, I prefer to name the offshore trustee as a successor that can take over only if necessary. In other words, if you have a large judgment against you, you can have the foreign trustee take over and move the assets out of the U.S.
The best time for doing any of this planning is BEFORE you have creditor problems. Be proactive. If you are already in the middle of a lawsuit against you, it is too late (at least with respect to that potential creditor).
The information in this blog was not intended as legal advice.
Paul Deloughery is an estate and probate litigation, and law insurance dispute consultant in Scottsdale, Arizona. Visit his website to read more of his blogs or follow him on Twitter!