The Uniform Voidable Transactions Act (UVTA), which amends and replaces the better known Uniform Fraudulent Transfer Act, was adopted by the National Conference of Commissioners on Uniform State Laws in 2014.1 Currently, nine states have adopted the UVTA,2 and several state legislatures have introduced it.3 While the UVTA made several important changes to clarify the law to prevent debtors from intentionally avoiding their legitimate debts, numerous advisors question if the UVTA went too far in both its provisions and comments,4 particularly regarding domestic asset protection trusts (DAPTs).5 As such, advisors warn that the UVTA will not only impact the corrupt debtor (which it should), but also, it could have the collateral effect of adversely affecting an individual who engages in sound and legitimate estate and wealth preservation planning (which it shouldn’t).6
Recognition of Out-of-State Trusts
Generally, states have traditionally recognized trusts established by its residents in other states with more favorable trust, asset protection and tax laws7 provided there’s not a strong public policy reason or lack of a substantial presence to reject these trusts. The same has been true with the selection of limited liability companies (LLCs) and corporations. Consequently, an individual’s right to do legitimate estate and wealth preservation planning has been historically recognized.8
Effect of UVTA
The UVTA attempts to change this with the addition of a governing law provision. Specifically, Section 10 of the UVTA provides: “a claim for relief…is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred.” Many advisors argue that this attempt to resolve the conflict-of-laws analysis negatively affects DAPTs by designating the law of the state where the transfer occurred, thereby eliminating any and all transfers to a DAPT from an individual in a UVTA state. The UVTA’s comments support this conclusion, but comments aren’t considered law.9
Factors for Upholding a DAPT
Regardless of whether this UVTA conflict-of-laws provision is the most efficient solution for determining governing law or if it even works, many advisors suggest that a DAPT will still be upheld even if the settlor is living in a UVTA state, assuming the DAPT state hasn’t adopted the UVTA in its entirety as currently drafted.10 If the court in a UVTA state determines that a voidable transaction has occurred, then the creditor would generally seek to enforce that judgment in the DAPT state that hasn’t passed the UVTA.11 The first question that a DAPT court may then ask is whether it must recognize the UVTA state’s judgment. Advisors suggest that absent a statute or case in the domicile state expressly stating that transfers to a self-settled trust in another state (that is, to a DAPT) violate the domicile state’s public policy,12 the DAPT state court wouldn’t need to afford full faith and credit (FFC) to the judgment from the domicile state. In Hanson v. Denckla,13 the U.S. Supreme Court supports this reasoning.
The comments of Section 4 of the UVTA imply that such transfers to DAPTs are per se voidable. But, the comments only cite to very old Pennsylvania case law, and as previously stated, comments aren’t law.14 Further, the Supreme Court noted in Schreyer v. Scott that debtors are free to take steps to protect assets from creditors that were neither in existence prior to, nor reasonably anticipated at, the time of transfer.15 Consequently, many advisors are of the opinion that unless specific case law or statutes16 exist in the UVTA state, no public policy argument would exist; furthermore, a lack of DAPT legislation isn’t a public policy argument against the DAPT state. Thus, the DAPT state shouldn’t be required to afford FFC to the domicile state’s judgment even if the comments of the UVTA are adopted.17 However, any states that have adopted or are considering adoption of the UVTA should consider amending and/or removing Section 4, Comment 2 and Section 10 and its comments from the state’s UVTA.
Conflict-of-Laws Analysis
Typically, the DAPT’s state court and the client’s domicile state court would likely turn to a traditional conflict-of-laws analysis regarding trusts to determine which state law would govern. Specifically, Restatement (Second) of Conflict of Laws (Restatement (Second)) Section 27318 states that so long as there are sufficient contacts to a state, a settlor of a trust can designate the laws that govern the trust.19 The “sufficient contacts” requirement was a major issue in In Re Huber.20 Additionally, Restatement (Second) Section 270(a)21 states that Section 273 applies so long as the law doesn’t violate a strong public policy of the state that has the most significant relationship to the trust. Consequently, unless trust situs and trust administration ties aren’t strong enough22 to the DAPT state pursuant to Section 273 (for example, substantial presence), and unless it can be shown that creating a DAPT in a DAPT state is a violation of the public policy of the settlor’s domicile state (see discussion above), typically, the DAPT state’s law would govern. Thus, the DAPT and its supporting laws would generally be upheld provided there wasn’t a fraudulent conveyance,23 an exception creditor24 or any other issue pursuant to the DAPT state’s laws.25
Awareness of State UVTA
Estate planners in all jurisdictions, particularly the DAPT states, need to be aware that while the UVTA law prevents some abuses of asset protection planning, it also may go too far as currently drafted, thus preventing legitimate estate and wealth preservation planning, which shouldn’t be the case. State legislatures seem to be passing the UVTA without knowing its possible impact on legitimate estate and wealth preservation. Additionally, many estate planners in these states seem to be unaware that their state passed a version of the UVTA and the impact of that law.26 The proponents of the UVTA should probably be more transparent in their marketing of the statute to various state legislatures, as well as to estate-planning advisors in those states, in particular, regarding Section 10 and Section 4, Comment 2. In anticipation of the UVTA, some states have already included language that their DAPT statute shall govern in the event of any conflict.27 This additional language provides state courts yet another provision to rely on in the event of conflict resulting from a judgment in a UVTA state. Consequently, states that have passed the UVTA should consider amendments, and states looking to pass the UVTA should use caution, particularly the DAPT states. Choice of trust situs has been a longstanding trust planning concept that should be protected.28
Endnotes
1. See Uniform Law Commission, Uniform Voidable Transactions Act, Enactment Status Map & Legislative Tracking, http://uniformlaws.org.
2. California, Georgia, Idaho, Iowa, Kentucky, Minnesota, New Mexico, North Carolina and North Dakota.
3. Indiana, Massachusetts, Michigan, New York and South Carolina. Estate planners in these states should be aware that the Uniform Voidable Transactions Act (UVTA) as proposed in their state, may prevent legitimate estate and wealth preservation planning. These states need to look at Section 10 and its comments and Section 4, Comment 2 before passing the UVTA.
4. See George D. Karibjanian, “The Uniform Voidable Transactions Act Will Affect Your Practice,” Trusts & Estates (May 2016), at p. 17; George D. Karibjanian, Gerald Wehle, Robert Lancaster and Michael A. Sneeringer, “New Uniform Voidable Transactions Act: Good for the Creditors’ Bar, But Bad for the Estate Planning Bar?” Part Two, LISI Asset Protection Planning Newsletter #317 (March 15, 2016); See George D. Karibjanian, Gerald Wehle and Robert Lancaster, “History Has Its Eyes on UVTA—A Response to Asset Protection Newsletter #319,” LISI Asset Protection Planning Newsletter #320 (April 18, 2016); Richard W. Nenno and Daniel S. Rubin, “Uniform Voidable Transfers Act: Are Transfers to Self-Settled Spendthrift Trusts by Settlors in Non-APT States Voidable Transfers Per Se?” LISI Asset Protection Planning Newsletter #327 (Aug. 15, 2016).
5. Sixteen states have enacted self-settled domestic asset protection trust (DAPT) statutes: Alaska, Delaware, Hawaii, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.
6. See supra note 4.
7. Restatement (Second) of Conflict of Laws (Restatement (Second)) Sections 270, 273 (1971); See also Riechers v. Riechers, 679 N.Y.S.2d 233, 236 (N.Y. Sup. Ct. Westchester 1998). In dictum, the court stated, “[a] cause of action would not lie to set aside the trust since the trust was established for the legitimate purpose of protecting family assets for the benefit of the Riechers family members.” The defendant-husband established an irrevocable trust in the Cook Islands, holding 99 percent of a Colorado limited partnership owning over $4 million of marital assets. The court held that it didn’t have jurisdiction over the corpus of the offshore trust, nevertheless the court ruled that the trust assets were part of the marital estate and were subject to inclusion in the calculation of the total marital assets. See also TrustCo Bank v. Susan M. Mathews, C.A. No. 8374-VCP, V.C. Parsons (Del. Ch. Jan. 22. 2015), in which a New York bank made a loan to a Florida limited liability company (LLC) with a personal guarantee by the defendant to construct self-storage facilities in Florida. The lender sued three Delaware DAPTs, contending that the defendant fraudulently transferred assets. The defendant claimed that the Delaware or Florida 4-year statute of limitations (SOL) should apply and not New York’s 6-year SOL. The court applied the 4-year Florida SOL and held that the plaintiffs’ fraudulent transfer claims were time-barred, finding that Florida and Delaware had more significant relationships than New York; Florida’s contacts included foreclosed real estate and business; Delaware contacts included Delaware trusts and Delaware trustees. The court further held that if New York had been deemed to have a more significant relationship, then Delaware’s “borrowing statute” (which states if a cause of action arises outside of Delaware, then either the applicable Delaware limitations period applies or that of the state where the cause of action did arise, whichever is shorter) would apply, and thus Delaware’s SOL would apply.
8. Schreyer v. Scott, 134 U.S. 405, 414-415 (1890). The U.S. Supreme Court held that individuals have a right to protect against future issues, stating, “Under such circumstances, the presumption of any fraudulent intent is rebutted, and it is manifest that he had done no more than any business man has a right to do, to provide against future misfortune when he is abundantly able to do so.”
9. See supra note 4.
10. Note that if a DAPT state adopts the UVTA and specifically, Section 10 Governing Law, and Section 4, Comment 2, this could prove problematic and possibly prevent legitimate estate and wealth preservation planning; see supra note 4.
11. See, e.g., Riechers, supra, note 7.
12. Note the designation of a state’s law to govern the duration of a trust doesn’t violate a strong public policy of the client’s resident state; see Restatement (Second) Section 69. Strong public policy arguments usually revolve around marital property issues; see, for example, Dahl v. Dahl, 2015 UT 23 (S. Ct. Utah 2015), in which the Utah Supreme Court held that a spouse had an enforceable interest in a Nevada asset protection trust. The court applied Utah law, reasoning that a strong public policy existed in favor of the equitable distribution of marital assets on divorce. The Nevada statute was and is silent on spousal transfers post-marriage.
13. Hanson v. Denckla, 357 U.S. 235 (1958). A Pennsylvania settlor who moved to Florida established a Delaware trust. The U.S. Supreme Court held that Florida had no jurisdiction over an inter vivos trust that was administered in Delaware with property held by a Delaware trustee. The Delaware trustee wasn’t subject to the personal jurisdiction of the Florida court, and Delaware wasn’t required to give full faith and credit to a Florida judgment.
14. See supra note 4; see also Section 4, Comment 2 of UVTA, citing MacKason’s Appeal, 42 Pa. 330, 338-39 (1862); Ghormley v. Smith, 139 Pa. 584, 591 (1891); Patrick v. Smith, 2 Pa. Super. 113, 119 (Super. Ct. 1896).
15. See supra note 8.
16. See supra note 4.
17. Ibid.
18. Restatement (Second) Section 273.
19. See George G. Bogert and George T. Bogert, The Laws of Trusts and Trustees Section 301 (rev. 2d ed. 1992); Uniform Trust Code Section 107; Restatement (Second) Section 270.
20. In Re Huber, 201 B.R. 685 (Bankr. W.D. Wash. May 17, 2013). The court held that Washington held the most significant relationship with the Alaska DAPT, not Alaska, and thus, Washington law applied. The settlor, a Washington resident, established an Alaska DAPT. The trust named an Alaskan corporate trustee in the DAPT state (Alaska) but named the settlor’s son, based in Washington, as co-trustee. The settlor’s son made frequent distributions to the settlor. This activity was one of the many factors that made the Alaska trustee look like a “straw man.” The Alaska trustee did very little. Additionally, an Alaska LLC (99 percent owned by the DAPT and 1 percent owned by the settlor’s son) held entities and real property located in Washington; the settlor’s son, based in Washington, was also the manager of the LLC. The case also featured fraud and bankruptcy issues and provides a useful lesson on how not to structure a DAPT to receive maximum situs protection and how not to administer a DAPT in light of the substantial presence test of Restatement (Second) Section 273.
21. Restatement (Second) 270 (1971).
22. See supra note 20.
23. See Al W. King, III “Defend Against Attacks on DAPTs?” Trusts & Estates (October 2014), at p. 11. Creditors may argue that there was a fraudulent conveyance to the trust. For this claim to prevail, the creditor must prove that there was intent to hinder, delay or defraud a specific creditor. This argument, generally, is subject to a “clear and convincing” or “preponderance of the evidence” standard of proof, which varies depending on the DAPT state’s statute. There’s also an SOL for a fraudulent conveyance (usually two to four years), depending on state statute, after which time a cause of action or claim for relief with respect to a transfer of the settlor’s assets to a DAPT is extinguished, and the creditor may not be able to reach the assets. If the creditor is an existing creditor at the time the DAPT is established, that creditor may also have the period of time starting from when the creditor discovers or or reasonably could have discovered the transfer to bring its claim (usually six months to a year), depending on state statute. Note that Nevada and South Dakota fraudulent conveyance periods are two years, and Alaska, Delaware, New Hampshire and Wyoming are four years.
24. See King, ibid. A creditor may also claim to be an exception creditor, that is, the creditor fits within a defined type or class, so that it may be able to reach the DAPT assets. Exception creditors vary by state statute. Some of the more common exception creditors are tort victims, divorcing spouses/marital property divisions and those receiving alimony or child support, and generally, any judgments in place at the time of the transfer regardless of state.
25. Ibid.
26. Based on the author’s discussions with advisors around the country.
27. See, for example, S.D. Codified Laws Section 55-16-9; see also similarly exclusive jurisdiction statutes in some DAPT states such as Alaska (Alaska Stat. Section 34.40.110(k)), Delaware (12 Del. C. Section 3572), Nevada (Nev. Rev. Stat. Ann. Section 166.120) and South Dakota (S.D. Codified Laws Section 55-16-13).
28. See, for example, supra notes 7, 19; see also Shannon v. Irving Trust Co., 9 N.E.2d 792,795 (N.Y. 1937) (“[W]e find nothing in our public policy which forbids extending comity and applying the New Jersey laws so as to carry out the wish of the settlor and sustain the trust.”); Hutchison v. Ross, 187 N.E. 65, 70 (N.Y. 1933) (“Where a non-resident settlor establishes here a trust of personal property intending that the trust should be governed by the law of this jurisdiction, there is little reason why the courts should defeat his intention by applying the law of another jurisdiction.”)