Combining the Trust with a Business Entity

April 13, 2006

	Visited: 119
	Not rated
	Rate:

The use of a Delaware or Alaska asset protection trust could result in a dispute over jurisdiction of conflicting state laws.

One strategy to increase the validity of this type of trust involves investing in real property in the state in which the trust was formed. Another involves having business contacts there as well.

In theory, the greater the contacts with Alaska or Delaware, the greater the likelihood that a court will uphold the validity of the trust. Therefore, because Delaware, in particular, represents a very favorable place to form a business entity, the business owner could first form the business entity there, and then have the business fund an asset protection trust in the same state. The entity could fund the trust as part of the compensation package for the owner of the business.

While certainly not a guarantee that the state will have jurisdiction over the trust, this strategy does at least offer support for this conclusion. For example, in a recent case the right of Connecticut to tax a Delaware trust was upheld on the grounds that Connecticut had jurisdiction over the trust. Connecticut was found to have jurisdiction, in large part, because the beneficiary of the trust was a resident of Connecticut.

Thus, by extension, it can be argued that Connecticut would assert jurisdiction over a Delaware asset protection trust where the beneficiary resided in Connecticut. This is a more likely outcome where the beneficiary is also the trustor, which is the usual scenario in an asset protection trust. If Connecticut law were to apply to the trust, the trust would be invalid, in accordance with the general rule (outside of Delaware and Alaska) that a self-settled asset protection trust with a spendthrift clause is invalid.

In contrast, if a Delaware entity created the Delaware trust, there is less likelihood that another state would be deemed to have jurisdiction, because the trustor exists in Delaware. It is possible, however, that a court would "collapse" the transactions and hold that the owner of the business entity effectively created the trust, or rule that the residence of the beneficiary alone would be determinative of the issue of jurisdiction. The only sure conclusion is that the use of the business entity to create the trust increases the possibility that Delaware law would be applied to the trust and that, accordingly, the trust will be declared valid.

Should a judgment be rendered in Alaska or Delaware upholding the validity of the trust, an argument also can be made that the trustor's home state will then be compelled by the same Full Faith and Credit Clause of the U.S. Constitution to honor this judgment.