Creditor's Rights: Comparing Alaska and Delaware Trusts

April 13, 2006

	Visited: 145
	Not rated
	Rate:

The Delaware and Alaska asset protection trusts are relatively new strategies for shielding assets. They have strict requirements in order for the trust to be valid. However, under certain circumstances creditors can reach the trust's assets.

The Alaska statute contains only two very narrow exceptions, under which creditors can reach the trust's assets. A creditor can breach the trust if:

the trustor transferred assets to the trust intentionally as a means of defrauding the creditor, and the creditor brings suit within one year of the time he or she learned, or should have learned, of the transfer, but within four years in any event, or
at the time of a transfer, the trustor was in default by more than 30 days under a court order of child support, and the creditor is attempting to enforce an order of child support

With respect to the first exception, the grounds that can be used by the creditor are actually narrower than it first appears. The Alaska statute requires that the creditor prove actual fraud--that is, intent, factually. This means the creditor is prohibited from using the "badges of fraud" that the courts have established, upon which intent can be inferred. Instead, the creditor must prove what the trustor was actually thinking at the time of the transfer. This is a very difficult burden.

The second exception is so narrow that it is quite easy to avoid. This narrowness also means that the trustor can immunize his or her assets against the alimony, child support (in most cases) and property claims of a past, present or future spouse. The effects of this provision are two-pronged: The protections offered by the statute are extremely significant, as these types of claims can exhaust wealth; since the protections are so extreme and seem to go against the trend, especially in terms of enforcement of child support orders, it means the provisions also will generate controversy, and thus challenges by creditors will be likely.

The Delaware statute creates much wider exceptions than the Alaska statute. Specifically, in Delaware, a creditor can reach the trust assets if:

actual fraud (intent) can be proved; here, unlike in Alaska, creditors can use the badges of fraud to establish intent; the same time limitations that apply in Alaska also apply in Delaware
the claim is made by a current, or former, spouse, and is for alimony or a property distribution
the claim is for child support
the claim stems from personal injuries or property damage, and the claim arose before the transfer

Work Smart

A common misunderstanding is that the Alaska and Delaware asset protection statutes are identical. This is incorrect, especially where the statutes provide exceptions that allow creditors to reach the trust's assets.

As discussed above, the Alaska statute offers significantly greater protection than the Delaware statute. In Alaska, absent actual fraud, current and former spouses cannot reach the trust's assets for claims of alimony, claims based on property distributions or virtually all claims for child support. Also, claims based on personal injury or property damage occurring before the transfer will not be successful in Alaska. In Delaware, all of these claims are specifically allowed by statute.

While the chances that the Delaware statute will be challenged are somewhat lower, this really is not an argument in favor of establishing the trust in Delaware. If the trust is formed in Alaska and a challenge is successful (e.g., for child support), the trustor will likely be no worse off than if the trust were set up in Delaware. However, in Alaska, there is at least a possibility that the creditor's claim will be defeated.

Generally, consideration should be made to forming the trust in Alaska rather than Delaware if child support, alimony and marital property distributions are important issues, or there is the possibility of a claim based on an earlier act of negligence.

If the business entity is formed in Delaware, the entity could establish the trust there. This may make it more likely that Delaware law will be applied to the trust and that, accordingly, the trust will be upheld as valid. This would be even more likely if the business entity had actual contacts there (e.g., an office, bank account, etc.) or if the trust owned real property in the state.

In short, the choice of a trust in Alaska or Delaware will depend on the individual's particular circumstances.