Since 2014, 21 states1have adopted the Uniform Voidable Transaction Act (UVTA),2 formerly the Uniform Fraudulent Transfer Act.3 It’s also important to note that five of these states are domestic asset protection trust (DAPT) states (Indiana, Michigan, Rhode Island, Utah and West Virginia). Additionally, several states have introduced UVTA legislation (Massachusetts, New Jersey, South Carolina and Wisconsin).4 The UVTA has made some important changes to clarify the law to prevent debtors from intentionally avoiding their legitimate debts. Despite these important debt avoidance provisions, many advisors have questioned if the UVTA has gone too far with some of its language and comments, particularly regarding DAPTs.5 As a result of these changes, the UVTA will not only impact the corrupt debtor (which it should) but also may have the collateral effect of adversely affecting individuals who engage in sound and legitimate estate and wealth preservation planning (which it shouldn’t).6 Consequently, the UVTA fundamentally attempts to change creditors’ rights regarding transfers to DAPTs, which should concern both clients and practitioners. As a result of these concerns, many states have finally started to listen, understand, reject and/or fix the shortcomings of the UVTA.
Awareness of State UVTA
Despite warnings from many advisors, state legislatures continue to pass the UVTA either ignoring or without knowing about its possible impact on legitimate estate and wealth preservation.7 Additionally, many estate planners in these UVTA states may be unaware that their state has passed a version of the UVTA and the impact of that law. The proponents of the UVTA should probably be more transparent in their presenting of the statute to various state legislatures, as well as to estate and wealth preservation planning advisors in those states.
For example, two issues of the UVTA that relate to wealth preservation are found in Section 10 and Section 4, Comment 2 and Comment 8. The comments of Section 4, for example, imply that transfers to DAPTs are per se voidable.8 The effect of the comments are to extend rights to creditors who neither existed nor were anticipated at the time of the grantor’s transfer.9 A common misconception regarding DAPTs is that they’re attempts to legally avoid a client’s debt; however, such an argument ignores the application of a particular DAPT state’s fraudulent (or voidable) transfer law.10 In fact, a common provision across all DAPT legislation provides that if a debtor creates a DAPT with the intention of defrauding a particular creditor, the property transferred into the DAPT is attachable as to that creditor.11 Nevertheless, the comments of the UVTA cite to very old Pennsylvania case law12 to make the argument that DAPTs are per se voidable in addition to making the blanket statement that a transfer to a DAPT is voidable if the transferor’s home jurisdiction hasn’t enacted DAPT legislation.13 It’s important to note that comments aren’t law. Further, the U.S. Supreme Court noted in Schreyer v. Scott14 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.
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,” even if a different DAPT jurisdiction is chosen.15 Generally, the grantor has been able to choose which state laws apply as long as there are sufficient contacts with the state, and the application of the law doesn’t violate strong public policy.16 Many advisors argue that this attempt to resolve the conflict-of-laws analysis may negatively affect DAPTs by designating the law of the state where the transfer occurred, thereby possibly eliminating any and all transfers to a DAPT from an individual in a UVTA state. The UVTA Section 10 comments support this conclusion. Again, comments aren’t law. Consequently, many advisors are of the opinion that unless specific case law or statutes exist in the UVTA state, DAPTs, if properly structured, sitused and administered, should still be a powerful wealth preservation vehicle.17 As more advisors have become aware of the issues with the UVTA and its comments, these advisors have advocated growing opposition to it.18
State Rejection
Many advisors also feel that the DAPT state shouldn’t be required to afford full faith and credit (FFC) to the domicile state’s judgment even if the DAPT state adopts the UVTA.19 Despite this, many states have adopted or are considering adoption of the UVTA with significant amendments. One example is the rejection of the problematic comments from the existing or proposed UVTA statute. This is a result of advisors voicing concern as well as providing legislatures statutory solutions to the shortcomings of the UVTA.20 For example, in its statute, Indiana codified specific language rejecting the comments, by stating: “However, in interpreting solely this chapter, comments released by a committee of the National Conference of Commissioners on Uniform State Laws shall not be considered as authority.”21 In addition, Arkansas in its legislative history specifically rejected certain comments of the UVTA.22
Furthermore, in anticipation of the UVTA, some states included language in their statutes that their DAPT statute shall govern in the event of any conflict.23 This additional language provides state courts with 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 and wealth preservation have long been trust planning concepts that should be protected.
Nevertheless, despite the UVTA, many advisors suggest that a DAPT will still be upheld even if the settlor is living in a UVTA state. 24 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. 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, the DAPT state court wouldn’t need to afford FFC to the judgment from the domicile state.25 In the context of a third-party trust, this line of reasoning was followed in In re Cleopatra Cameron Gift Trust.26 In Cleopatra, a California judgment pierced the spendthrift provision of a trust, a concept emphatically rejected in South Dakota, where the legislature has “rejected even the specter of an argument” that would allow support creditors to reach trust funds protected by a spendthrift provision. As such, the South Dakota Supreme Court held that a South Dakota court wasn’t required to submit to a California judgment to compel direct payments from a trust because the method of self-executing enforcement wasn’t authorized by South Dakota law.27
States Should Consider Changes
With over 19 states now having self-settled DAPT28 statutes, such planning has gained enormous popularity since Alaska passed the first statute in 1997. States that haven’t enacted the UVTA should consider caution and understanding of the ramifications of the UVTA and put in place safeguards, if enacted, as was done in Indiana and Arkansas. Those states that have already enacted the UVTA should strongly consider statutory changes to amend or remove Section 4 Comments 2 and 8 and Section 10 and its comments. Clients will most likely want to choose a non-UVTA state to situs their DAPT.
Endnotes
1. Alabama, Arkansas, California, Georgia, Idaho, Indiana, Iowa, Kentucky, Michigan, Minnesota, Nebraska, New Mexico, New York, North Carolina, North Dakota, Pennsylvania, Rhode Island, Utah, Vermont, Washington and West Virginia. See Uniform Law Commission, Uniform Voidable Transactions Act (UVTA), Enactment Status Map & Legislative Tracking, http://uniformlaws.org.
2. The UVTA, issued by the Uniform Law Commission of the National Conference of Commissioners on Uniform State Law (July 2014).
3. Ibid.
4. Ibid.
5. See George D. Karibjanian, “The Uniform Voidable Transactions Act Will Affect Your Practice,” Trusts & Estates (May 2016); George D. Karibjanian, Gerard Wehle, Robert Lancaster and Michael Sneeringer, “New Uniform Voidable Transactions Act: Good for the Creditors’ Bar, But Bad for the Estate Planning Bar?—Part Two,” Leimberg Information Services (March 15, 2016). See George D. Karibjanian, Gerard Wehle and Robert Lancaster, “History Has Its Eyes on UVTA—A Response to Asset Protection,” Leimberg Information Services (March 15, 2016); Richard W. Nenno and Daniel S. Rubin, “Transfers to Self-Settled Spendthrift Trusts by Settlors in Non-APT States Voidable Transfers Per Se?” Leimberg Information Services (Aug. 15, 2016); George D. Karibjanian, Gerard J.J. Wehle and Robert L. Lancaster, “A Memo to the States—The UVTA Is Flawed … So Fix It!!!” Leimberg Information Services (May 2, 2018); George D. Karibjanian, “Two DAPT States Adopt the UVTA—Smart Move or Falling For the Long Con?” www.wealthmanagement.com (April 11, 2017); Al W. King III, “Be Aware of the Uniform Voidable Transactions Act” Trusts & Estates (October 2016); George D. Karibjanian, Richard W. Nenno and Daniel S. Rubin, “The Uniform Voidable Transactions Act: Why Transfers to Self-Settled Spendthrift Trusts by Settlors in Non-APT States Are Not Voidable Transfers Per Se,” Bloomberg BNA Tax Management Estates, Gifts and Trusts Journal (July 2017).
6. Al W. King III, “Be Aware of the Uniform Voidable Transactions Act,” Trusts & Estates (October 2016).
7. See supra note 5.
8. See George D. Karibjanian, Gerard Wehle and Robert Lancaster, “History Has Its Eyes on UVTA—A Response to Asset Protection,” Leimberg Information Services (March 15, 2016).
9. See supra note 5.
10. George D. Karibjanian, “Two DAPT States Adopt the UVTA—Smart Move or Falling for the Long Con?” www.wealthmanagement.com (April 11, 2017).
11. Ibid.
12. Daniel G. Worthington, Mark Merric, Paul MacArthur and John E. Sullivan III, “Best Situs for DAPTs in 2019?” Trusts & Estates (December 2019); 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).
13. See supra note 10.
14. Schreyer v. Scott, 134 U.S. 405, 414-415 (1890). The U.S. Supreme Court has 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.”
15. See supra note 2.
16. See supra note 6; Restatement of Conflicts of Law (Restatement of Conflicts) Sections 270 and 273 (1971); George G. Bogert and George T. Bogert, The Laws of Trusts and Trustees Section 301 (rev. 2d ed. 1992); Uniform Trust Code Section 107. See also In re Huber, 201 B.R. 685 (Bankr. W.D. Wash. May 17, 2013). The sufficient contacts requirement was a major issue in the Huber case. It’s a bad facts case. The court held that Washington held the most significant relationship with the Alaska domestic asset protection trust (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 limited liability company (LLC) (99% owned by the DAPT and 1% 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 of Conflicts, Section 273.
17. See supra note 5.
18. Ibid.; see the “New York City Bar Association (City Bar) Report on Legislation,” which specifically provided commentary that it rejected the comments of the UVTA, https://s3.amazonaws.com/documents.nycbar.org/files/2007 UVTABillMemo_Commercial&Bankruptcy_FINAL_10.6.16.pdf.
19. Note that if a DAPT jurisdiction adopts the UVTA and specifically includes Section 10 (Governing Law) and Section 4, Comments 2 and 8, this could prove problematic and possibly prevent legitimate wealth preservation planning using DAPTs in that state.
20. George D. Karibjanian, Gerard J.J. Wehle and Robert L. Lancaster, “A Memo to the States—The UVTA Is Flawed … So Fix It!!!” Leimberg Information Services (May 2, 2018).
21. Indiana Code 32-18-2-23.
22. See also Arkansas Act 1086, Sect. 2.
23. 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).
24. See supra notes 5 and 10.
25. Ibid.
26. In re Cleopatra Cameron Gift Trust, 2019 S.D. 35.
27. The Supreme Court of South Dakota ultimately denied full faith and credit to a California support judgment involving a California trust. This case involved a trust that changed situs from California to South Dakota. Specifically, the court held that enforcing judgments doesn’t implicate full faith and credit considerations. As such, the South Dakota circuit court wasn’t required to submit to the California order compelling direct payments from the trust if this method of self-executing enforcement wasn’t authorized by South Dakota law. The court went on to explain that the enforcement did in fact violate South Dakota law as South Dakota doesn’t have irrevocable third-party trust spendthrift clause exception creditors and doesn’t follow the Restatement (Third) of Trusts. South Dakota’s discretionary interest statutes based on the Restatement (Second) of Trusts and the common law were key factors.
28. The 19 jurisdictions that have DAPT statutes are: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, Wyoming, Connecticut and Indiana.