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Seventeen states now have statutes allowing for the creation of a domestic asset protection trust (“DAPT”), also sometimes referred to as a self settled spendthrift trust or a self settled asset protection trust.[1] Although these state statutes may exist in various forms, at their core DAPT statutes are created to allow a person, also known as the grantor, (i) to create an irrevocable trust by transferring assets to such trust, (ii) to continue to enjoy, to some degree, control and beneficial enjoyment over the trust property, and (iii) to shield the assets transferred to the trust from potential creditors. Typically, a DAPT must have a trustee, usually a corporate trustee, that is domiciled in the applicable jurisdiction.

In 1997, Alaska became the first state to permit the creation of DAPTs. It is therefore only fitting that the most recent case regarding a DAPT statute, Toni 1 Trust v. Wacker, comes to us from Alaska.

The facts of Toni 1 Trust are as follows. During a period of time when a state court in Montana was issuing a number of judgments against Donald Tangwall, Donald’s wife Barbara Tangwall, and Donald’s mother-in-law Margaret (“Toni”) Bertran, in favor of the Wacker family, with whom the Tangwalls had been tied up in litigation with for years, Toni Bertran transferred certain real property to a trust created under Alaska law named “Toni 1 Trust.” The Wackers filed an action in Montana state court alleging the transfers of the real property to the Toni 1 Trust were fraudulent under Montana law because they were made in order to avoid the judgments issued and being issued against the Tangwalls. A default judgment was entered in favor of the Wackers by a Montana state court in the fraudulent transfer action; however, Toni Bertran filed for bankruptcy in Alaska under Chapter 7, making her interest in the property of the Toni 1 Trust subject to the jurisdiction of the federal bankruptcy court. As did the Montana state court, the federal bankruptcy court issued a default judgment in favor of the Wackers stating that the transfers were fraudulent as they were made to avoid judgments.

Utilizing Alaska statute AS 34.40.110(k), Donald Tangwall, as trustee of the Toni 1 Trust, brought an action against the Wackers in Alaska requesting that the federal bankruptcy judgments and Montana state court judgments be set aside as void because Alaskan courts have exclusive jurisdiction over fraudulent conveyance claims involving Alaska DAPTs. This argument would greatly benefit the Tangwalls because they also claimed that if an Alaskan court was the only court able to rule on the fraudulent conveyance matter, then such an action could be barred by the statute of limitations. AS 34.40.110(k) states that Alaska courts have “exclusive jurisdiction over an action brought under a cause of action or claim for relief that is based on a transfer of property to [an Alaskan DAPT].”

While the Alaska Supreme Court stated that the Tangwalls were correct that a judgment would be void if the court that entered the judgment did not have subject matter jurisdiction over the case, and that AS 34.40.110(k) does state that exclusive jurisdiction over fraudulent conveyance claims against an Alaskan DAPT rests with Alaskan courts, the court concluded that AS 34.40.110(k) cannot “prevent other state and federal courts from exercising subject matter jurisdiction over fraudulent transfer actions against [Alaskan DAPTs].” In citing the United States Supreme Court ruling in Tennessee Coal, Iron, & R.R. Co. v. George,[2] stating that “the Full Faith and Credit Clause does not compel states to follow another state’s statute claiming exclusive jurisdiction over suits based on a cause of action ‘even though [the other state] created the right of action’”, and especially because in Toni 1 Trust the cause of action was not even created under Alaska law but rather arose under Montana law, the Alaska Supreme Court held that the Montana state court judgements were not void for lack of jurisdiction. Similarly, citing another United States Supreme Court case, Marshall v. Marshall,[3] and also making reference to the Supremacy Clause, the Alaska Supreme Court held that the federal bankruptcy court judgements were not void for lack of jurisdiction.

While the ruling in Toni 1 Trust is narrow and does not address many of the lingering issues surrounding the protections claimed to be afforded by DAPT statutes and proponents thereof, this case should be included in the discussion with a client pointing out the various issues and uncertainties associated with DAPTs and the various state DAPT laws.

[1] The seventeen states with DAPT statutes are as follows: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, Utah, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. See Merric, Marc, et al., Best Situs for DAPTs in 2019 – A ranking of jurisdictions that offer the best protection in light of recent case and the UVTA, Trust & Estates (Dec. 13, 2018), at https://www.wealthmanagement.com/estate-planning/best-situs-dapts-2019

[2] 233 U.S. 354 (1914).

[3] 547 U.S. 293 (2006).