Several states have adopted asset protection trust statutes that allow a grantor to establish a trust that is protected from the grantor’s creditors, even though the grantor is a discretionary beneficiary. These states include Nevada, Alaska, and Delaware.
We have advised grantors that do not reside in one of these states that if they establish such a trust in one of these jurisdictions that the trust may not be effective for them. One possible line of challenge is that if a judgment is obtained in their state of residence, the Full Faith and Credit Clause of the US Constitution may allow for the enforcement of that judgment against the trust assets in another state, notwithstanding local law provisions in that state. Another line of attack would be to seek to apply the law of the grantor’s state of residence in bankruptcy to reach the trust assets. A recent bankruptcy decision indeed took that later approach, ruling that the assets of an Alaska asset protection trust are exposed to the creditors of a Washington grantor.
Rubin on Tax: A NOT-SO-GOOD DOMESTIC ASSET PROTECTION TRUST CASE