"I See the Sword of Damocles Is Hanging above Your Head!" Domestic Venue Asset Protection Trusts, Credit Due Judgments, and Conflict of Law Disputes

By Nichols, Bryan | The Review of Litigation, Spring 2003 | Go to article overview

"I See the Sword of Damocles Is Hanging above Your Head!" Domestic Venue Asset Protection Trusts, Credit Due Judgments, and Conflict of Law Disputes


Nichols, Bryan, The Review of Litigation


Between the idea

And the reality

Between the motion

And the act

Falls the shadow.

-T.S. Eliot1

I. INTRODUCTION: THE POINT OF DEPARTURE

This Note examines domestic venue asset protection trusts in light of the credence (or lack thereof) given to judgments and laws of other states. Given that only four states currently allow for the creation of self-settled spendthrift trusts,2 a lawsuit involving such trusts will almost certainly bring conflict of law disputes into consideration. This Note focuses on the probable fate of an individual who creates a domestic venue asset protection trust and later seeks to thwart the seizure of his assets after an adverse judgment has been rendered against him.

Part II of this Note begins with a brief analysis of and justification for asset protection strategies, particularly the trust. Next, the offshore trust is contrasted with the general American opinion on self-settled spendthrift trusts. Part II ends with a discussion of the availability of self-settled spendthrift trusts within the boundaries of the United States.

Part III of this Note provides a simple fact scenario giving consideration to a few typical threats against a domestic venue asset protection trust in a litigation context: first, whether such a trust would remain untouched in spite of an adverse judgment rendered in another state, and second, whether another state must respect the law of one of the four states allowing domestic venue asset protection trusts, or simply follow its own law (which would likely result in the seizure of the trust assets). Finally, the Note concludes with a summary of the utility (or futility) of domestic venue asset protection trusts.

II. ASSET PROTECTION AND SELF-SETTLED SPENDTHRIFT TRUSTS

Along life's way, many individuals seek financial security. The quest for financial security, though often denounced as greed, is an important part of life, especially in light of such things as the unpredictability of economic downturns, the rising costs of health care, and the ubiquitous explosion of litigation. Put simply, people want to accumulate wealth in order to satisfy current desires and save for the rainy day.

A. The Omnipresence of Liability-Generating Activities

Every day, individuals engage in liability-generating activities. These activities are often economic in nature, though they need not be. Such activities range from the risky multi-million dollar business venture to the casual drive along a neighborhood street, from a surgeon's delicate excision of a cancerous tumor to a friendly game of basketball. It is common knowledge that every gainful opportunity presents the potential for misfortune.3 If life is beset by potential misfortune, then it is worthwhile to create ways in which we can invest our energies and ward off financial threats at the same time.4 The foregoing considerations legitimize asset protection.5 This is especially true for wealthy individuals, who fear the seemingly limitless liability posed by our country's litigation explosion.6

B. Business Structures as Liability-Thwarting Mechanisms

High net worth individuals, seeking to protect and preserve a portion of their riches, engage in a variety of activities to accomplish this task. Traditional methods of asset protection involve the use of limited liability partnerships, limited liability companies, and family limited partnerships.7 These traditional business structures normally ensure that personal assets will not be threatened if an adverse judgment exceeds the assets of the business venture.8

The utility of these business arrangements, however, is not perfect: more than a few "ends-minded judges and sympathetic juries" have looked past these business entities in an effort to satisfy judgments.9 Consequently, a large portion of current asset protection strategies emerged as a response to the failure of these business arrangements. …

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