Monday, February 26, 2007
Darsi Newman Sirknen (Associate, Woolf, McClane, Bright, Allen & Carpenter, PLLC, Knoxville, Tennessee) has recently published her article entitled Domestic Asset Protection Trusts: What's the Big Deal?, 8 Transactions 133 (2006).
Here are a few excerpts from her article:
Within the last decade, a few American states have enacted legislation allowing self-settled spendthrift trusts, or "asset protection rusts" ("APTs"). Before these statutes were enacted, a number of foreign countries recognized these trusts, but they had never before been recognized in the United States. Professors, practicing lawyers, and other scholars have written numerous articles concerning this relatively new device. Several of these articles have been negative, expressing outrage that such "court and creditor thwarting" trusts that are "an affront to the public policy of the other ... states" have moved from their traditional offshore homes to take up residence in the United States. But is all the outrage really justified? This paper examines the domestic APT and offers the conclusion that the APT is worth far less attention than authors recently have given it. * * *
Many authors express outrage that some states now allow wealthy settlors to retain the enjoyment of their property while their creditors go unsatisfied. Some essentially predict the country's moral downfall due to this horrendous new "trick" up the sleeves of wealth protection planners. But is all the outrage really warranted? One professor has stated, "The treatment of spendthrift trusts can make a nice legal point ... but it strains credibility to believe that a change in the law will affect more than a handful of people each year." As of 2003, a little over five years after the first APT legislation became effective, a Delaware practitioner estimated that "a few hundred" Delaware APTs had been created with a market value exceeding $2 billion. He also indicated that "several" Nevada APTs and "a few" Rhode Island APTs had been created. An Alaska practitioner estimated that 310 nonresidents and 125 residents of Alaska had created Alaska APTs. It is almost certain that more trusts have been created in the last couple of years, but these numbers are still not astronomical considering the total population of the United States, or even the population of the APT states alone. Despite hundreds of trusts being created, however, the author has been unable to find any case in which a creditor has brought a challenge to a domestic APT. In addition, the number of bankruptcy filings in Alaska from 1997 to present and in Utah from 2003 to present has remained roughly the same. Statistics from Delaware show that the number of bankruptcy filings between 1997 and 2001 nearly doubled, but this could be due to the introduction of a new computer system in 2001 that does not continue to track cases filed and resolved prior to that date. In any case, this information may indicate that perhaps the settlors of these trusts really have legitimate motives other than thwarting courts and creditors. And for those few settlors who intend to abuse the system (for there will always be abuse, whether it is of the APT system, available tax planning devices, or something else), there are other disincentives more powerful than negative APT commentary.