In States We “Trust”: Self-Settled Trusts, Public Policy, and Interstate Federalism

Duffy, Brendan | December 15, 2016

Over the last twenty years, domestic asset protection trusts have risen in popularity as a means of estate planning and asset protection. A domestic asset protection trust is an irrevocable trust formed under state law which enables an independent trustee to allocate money to a class of persons, which includes the settlor. Since Alaska first enacted domestic asset protection legislation in 1997, fifteen states have followed its lead. The case law over the last twenty years addressing these trust mechanisms has, however, been surprisingly sparse. A Washington bankruptcy court decision, In re Huber, altered this drought, but caused more confusion by holding that a public policy exception trumped standard choice of law analysis. The end result: The court applied the law of the settlor’s state, which prohibited these trusts, rather than the law of Alaska, where the trust actually originated. This Note argues that the Huber decision was wrongly decided and provides a framework for future courts considering the choice of law issues related to domestic asset protection trusts. This Note also demonstrates that economic, public policy, and federalism considerations support the choice of law outcome.