The final topic in Duncan's mini-seminar to Lars and Bernie, on asset protection: self-settled trusts. This is something newish to Lars, and seemingly rather complicated in an intriguing sort of way, like a TV drama. So he's looking forward to clearing up his thoughts on the subject.
Duncan, as usual the good explainer, starts by saying the law is generally that, if Bernie sets up a trust and makes himself a beneficiary of it, the trust is available to Bernie's creditors. That's the law of Bernie's home State of Washington, for example. However, in recent years some enterprising states, looking for trust business, have changed their laws to give protection to such self-settled trusts. Thus, Bernie and Liza may put assets in a trust in Alaska or Delaware, and if done properly this will allow them to be beneficiaries and at the same time enjoy protection of the trust from their creditors.
A couple of the key elements of a self-settled trust are that the trustor or settlor (the person or couple who sets it up and funds it) may not be the trustee, and they may not be guaranteed distributions from the trust. They may, however, name a friendly party as trustee, who may distribute funds from the trust to them under a discretionary standard. In addition, the trust must have some Alaska (or Delaware) connection to take advantage of the favorable law. The connection might be an Alaska LLC or Alaska property contributed to the trust, and a meaningful account with an Alaska bank.
There are offshore jurisdictions offering this protection as well, and some advisers prefer them out of fear that Alaska might buckle under pressure from another US jurisdiction (say by a Federal Court), and not be able to fully enforce its protection. A recent case creates just a hint of concern about the effectiveness of self-settled trusts.
Mr. Mortenson of Alaska wasn't a typical asset protection trust customer. He was a struggling contractor who bought a $50,000 piece of property he considered a legacy for his family. So in 2005 he put it in an Alaska trust with the right-seeming provisions to keep it away from future claims. He was solvent at the time, but by thousands rather than by millions. He wouldn't have done the trust if he didn't have some concern that, if he fell on hard times, a creditor might some day come after the real estate.
By 2009 he was broke. The bankruptcy court, somewhat surprisingly Duncan thought, applied a Federal ten-year statute of limitations and found the trust a fraudulent conveyance. So the property was available to creditors after all.
What does Duncan say is the lesson of Mortenson? An asset protection trust works better if you're way solvent, like by millions.