Law for Sale: Alaska and Delaware Compete for the Asset Protection Trust Market and the Wealth That Follows
Wagenfeld, Amy Lynn, Vanderbilt Journal of Transnational Law
Imagine the following example of a typical asset protection minded individual: a married man with children who has amassed a good deal of wealth as a successful surgeon. Like many high-net-worth professionals, he is worried about the potential of a lawsuit and the devastating effect it would have on his hard earned fortune.(1) With no known existing creditors, he transfers the majority of his assets into a trust created under the laws of the Cook Islands.(2) His only stated purpose for creating the trust is to preserve his family's fortune for the benefit of himself, his wife, and his children. Subsequently, he receives notice that his medical malpractice insurance will be canceled. As a result, he decides to switch to a lower risk practice area and gives up surgery to become a general practitioner.(3) However, even general medicine is not risk free; during the treatment of a patient he commits medical malpractice. The injured patient sues and receives a judgment award of $500,000 only to learn that almost all of the doctor's assets are located in an offshore trust.(4) Cook Islands law does not recognize U.S. judgments, so the victim cannot enforce this judgment against the assets located in trust.(5)
Unlike most states in the United States, the Cook Islands do allow the creator of a trust to be a trust beneficiary' and to exercise a certain degree of control over the disposition of the trust. This means that the doctor may receive payments of income from the same trust assets that are unavailable to satisfy the victim's judgment--essentially he gets the best of both worlds. This result seems unfair to the unsatisfied victim.
This outcome does not resonate well with what has traditionally been the well-settled principle of U.S. law that one should not be able to benefit from and control property that is inaccessible to his creditors. Nonetheless, two states have modeled their trust laws after this paradigm. Alaska and Delaware recently passed legislation that may make it possible for any U.S. citizen to set up a trust in the United States that achieves benefits previously attainable only through offshore trusts.(6)
For years, U.S. citizens have looked to offshore jurisdictions to create trusts that protect a settlor's assets from the claims of creditors, yet allow the settlor to be named as a beneficiary.(7) United States law and public policy have long been against the idea of allowing a person to enjoy benefits from assets that are simultaneously shielded from creditors' claims.(8) However, despite this existing public policy, Alaska and Delaware have enacted statutes that attempt to do just that.(9) Essentially, these statutes claim to make what used to be possible only offshore, now possible in the United States.
This Note seeks to show that regardless of whether the new legislation is effective in protecting assets from creditors, its mere passage seems to mark a break from long-standing U.S. public policy against self-settled spendthrift trusts.(10) This well-established policy, reflecting ideas of equity and fairness, dictates that debtors should use available resources to pay their debts.(11) This policy is most pronounced in situations where people are able to successfully shield their trust assets from such involuntary creditors as spouses, children, and tort victims. It seems that the Alaska and Delaware legislators may be willing to ignore what is fair to creditors in order to bring money into their states.(12) In fact, these legislators may be putting the interests of their respective states, as well as the interests of wealthy asset protectors, before the rights of creditors, previously held concepts of fairness, and what has been the prevailing law in this country. If estate planners and asset protectors elect to utilize trusts under these new statutes, Alaska and Delaware stand to be the depositories of massive amounts of wealth. This will translate into financial growth in each state through increased business among banks, attorneys, accountants, financial advisors, and any other professions that will assist clients in establishing and managing these trusts, the benefits of which will trickle down throughout each state's economy. …