Recently, the Alaska Supreme Court in Toni 1 v. Wacker put a nail in the coffin of domestic asset protection trusts as effective creditor protection for out of state donors. After a Montana state court issued a series of judgments against Donald Tangwall and his family, the family members transferred two pieces of property to the “Toni 1 Trust,” a trust allegedly created under Alaska law. A Montana state court and an Alaska bankruptcy court found that the transfers were made to avoid the judgments and were therefore fraudulent. Tangwall, the trustee of the Trust, then filed suit, arguing that Alaska state courts have exclusive jurisdiction over such fraudulent transfer actions under AS 34.40.110(k). The Alaska Supreme Court concluded this statute could not unilaterally deprive other state and federal courts of jurisdiction, therefore it affirmed dismissal of Tangwall’s complaint.
Planners have long wondered if the full faith and credit clause of the US Constitution would prevail over state laws in DAPT states. The answer is “yes” in Alaska. It likely is “yes” anywhere else in the United States.
You can still do a DAPT for estate planning reasons, and they do provide asset protection as a trust in the state of the donor’s residence would. You just can’t avoid a judgement in the donor’s state of residence by fraudulently transferring assets to a DAPT created in another state.
You can still create a foreign trust which isn’t subject to the constrains of the US Constitution, but foreign trusts raise another set of issues.
When in comes to asset protection planning, do it when the skies are clear and have other reasons for doing it.