For many years, asset protection planners have believed and promoted the idea that an out-of-state resident could take advantage of the strong charging order laws in another state by filing their LLC in another state. Recent cases show that this does not work.
In American Institutional Partners, LLC v. Fairstar Resources, Ltd., 2011 WL 1230074 (D.Del., Mar. 31, 2011), a Utah resident established several Delaware LLCs with the hope that they could take advantage of the better charging order statute in the State of Delaware. When the Utah resident was sued in a state court in Utah, the Utah court stated “that Utah law applies to all execution proceedings in this matter, including the foreclosure of a member’s interest in a limited liability [company], whether such company is domestic or foreign.” In other words, the Utah court used their own law and ignored the law of the state where the LLC was filed.
This means that you shouldn’t believe those who heavily advertise the use of a Wyoming LLC for asset protection purposes, because if you are sued in a state outside of Wyoming, the court will probably use their own law and you won’t get the benefits of a Wyoming LLC.
A self-settled trust is a trust in which the grantor is also included as a beneficiary. Historically, all fifty states did not allow asset protection for a self-settled trust.
In recent years, several states have passed laws allowing asset protection for a self-settled trust. These states include Alaska, Nevada, Delaware, Tennessee, Utah, Hawaii, Missouri, New Hampshire, Oklahoma, Rhode Island, Wyoming and South Dakota. Many have promoted self-settled trusts under the name of a “Domestic Asset Protection Trust,”an “Alaska Asset Protection Trust,” a “Nevada Asset Protection Trust,” etc. As more and more cases show that offshore trusts can be attacked through the use of a contempt order, these “Domestic Asset Protection Trusts have become quite popular.However, a recent bankrupcty case (Battley v. Mortensen, Adv. D. Alaska, No. A09-90036-DMD, May 26, 2011) shows that self-settled asset protection trusts are ineffective at protecting assets from bankruptcy
. This is not a situation where bad facts make bad law. This is a case where the debtor settled the trust when he was not insolvent, and it was done four years before the debtor filed for bankruptcy.The reason the self-settled asset protection trust failed is because of a new bankruptcy law (Section 548(e)(1)) which specifically applies to a self-settled trust. This law allows the bankruptcy court to avoid any transfer made to a self-settled trust within ten years of the bankruptcy filing if the debtor made the transfer with actual intent to hinder, delay, or defraud any entity to which the debtor became indebted whether the debt occured before or after the transfer.It is important to note that the Mortensen case and Section 548(e)(1) have no affect on any trust in which the debtor is not a beneficiary; they only apply to self-settled trusts. Thus, our trust continues to be the best asset protection trust available in or out of the US because it is supported by the federal bankruptcy code (See Section 541(b)(1)), the Uniform Trust Code (See Section 505), the Restatements of the Law (See RESTATEMENT (SECOND) OF TRUSTS Section 156(2)), and many statutes and court cases throughout the country.Click HERE to read the case.