The Huber case: do self-settled asset protection trusts work? (2 of 3).

June 20, 2013, by

bank vault opened.jpgThe Federal Bankruptcy Court in Tacoma made two main holdings pertinent to our discussion. First, it found that under either Federal or State law, the transfers to Don Huber's self-settled Alaska asset protection trust were fraudulent conveyances and thus ineffective to protect the transferred assets from Don's creditors. This is not greatly surprising in retrospect; Don seemed to have reason to fear financial disaster by the time the Alaska trust was established, and that turned out to be the case.

The Court made another ruling that wasn't really necessary since it had already invalidated the transfers to the Alaska trust. This other holding surprises some. It considered whether the trust would have been legally valid even if the transfers to it had been upheld. It first had to decide whether Alaska law applied to the question, as the trust documents stated, or whether the law of Don's home state (Washington) should instead be governing. The law of Washington does not authorize self-settled asset protection trusts; it says that if such a trust falls under its laws, it may be reached by creditors of the person who established it.

To determine this question, the Court looked to a provision in the scholarly Restatement (Second) of Conflict of Laws:

"An inter vivos trust of interests in movables [editor's note: a trust established during lifetime, and funded with assets other than real estate] is valid if valid

(a) Under the local law of the state designated by the settlor [here Don Huber, who said Alaska law was to apply] to govern the validity of the trust; provided that this state has a substantial relation to the trust AND [emphasis added] the application of its law does not violate a strong public policy of the state with which, as to the matter at issue, the trust has its most significant relationship under the principles stated in Section 6..."

This means that even if an asset protection trust is formed in Alaska and has a substantial relation to Alaska, if it has a stronger relation to Washington then a Court in Washington may apply a policy of Washington that contravenes Alaska law. That's just what the Court did, to invalidate Mr. Huber's Alaska trust.

Don was already out of luck by other findings, but what does the Federal Bankruptcy Court's position on this last issue mean for Alaska and other states (Delaware and South Dakota among them) that have these favorable asset protection laws, and for those persons from other states who establish self-settled trusts there?