Article on Alaska and Asset Protection Trusts
The subject of Trusts and Estates has been a thorn in the side of law students and practitioners for decades and it is filled with incomprehensible concepts such as the rule against perpetuities–one of only a handful of subjects in which a court will excuse an attorney for lacking mastery. By the 1970s, offshore trusts had come to be seen as a way for those with wealth to shield their assets from U.S. tax liabilities. In an attempt to close this tax loophole, Congress passed the Tax Reform Act of 1976, which enabled the Internal Revenue Service (IRS) to treat assets transferred by an American to a foreign trust as the American settlor’s assets. Thus, beginning in the mid-1980s, the primary motivation for moving assets offshore changed from tax sheltering to protection from creditors. Seeing a need to create asset protection shelters, several small island jurisdictions, led by the Cook Islands, began to develop a foundational legal structure to support the influx of U.S. assets.In 1997, seeing the opportunity to compete against offshore asset protection trusts by developing a competitive environment, Alaska became the first state to recognize self-settled discretionary spendthrift trusts (also known as self-settled asset protection trusts) as a way to shield a settlor’s assets from creditors.
Almost fifteen years have passed since Alaska became the first state to recognize the use of asset protection trusts. Since that time, commentators have written numerous articles about the race to the bottom, the destruction of creditors’ rights, and the general money-hungry state of our society. What these materials have not addressed, however, is whether Alaska’s decision to become the first state to offer such protection allowed it to reap the benefits intended by its legislature. This Note attempts to answer this question by providing a background on trusts and the current state of the U.S. asset protection landscape.
Part I provides a brief explanation of trusts and their uses through an examination of the history of asset protection trusts offshore. Part II examines the legislative history of Alaska’s 1997 Trust Act and attempts to parse the legislature’s various considerations and its primary motivations for passing the Act. Part II also examines the Act’s substance and subsequent amendments. Part III describes the aftermath of the Act’s passage, including other states’ reactions and subsequent challenges to domestic asset protection trusts. Finally, in light of the preceding sections, this Note concludes by providing insight regarding whether Alaska has achieved the goals it set out during the Trust Act’s passage.