[PREFATORY NOTE: I previously wrote on the Dahl case when the opinion came out from the Utah District Court in my article "Why Dahl Doesn't Support The Viability Of Domestic Asset Protection Trusts" as found at http://onforb.es/15wKTky or http://goo.gl/Agh5d On January 31, 2015, the Utah Supreme Court reversed and issued a contrary opinion, which this article is about. See my earlier article for greater detail about the case and my prior comments.]
FACTS
Dr. Charles Dahl, a practicing cardiologist in Utah, and his wife, Kim Dahl, had been married for 18 years, and two children, before calling it quits in 2006. What ensued thereafter was an extremely bitter and contentious divorce proceeding, where the former best friends and lovers fought over everything from alimony, to custody of their children, and of course marital assets.
An attempt to chronical all the myriad cases and proceedings, hearings and appeals, would be somewhat akin to attempting to describe the Allies' 1944 invasion of Europe -- it would require a substantial tome. Instead, we will here focus on the part that is particular relevance to the field of trust law as it relates to asset protection and choice of law issues.
Kim brought an action against Charles, a Nevada Trust that he had formed in 2002, and Charles' brother, Robert, who served as the Investment Trustee. In the lawsuit, Kim sought a declaratory judgment "concerning the parties' rights and duties under the Irrevocable Trust", namely, that Kim was a settlor of the trust and it was revocable as to her portion of the couple's primary residence that was deeded into the trust in 2003. Kim also argued that the trust was revocable as to Charles, because he had reserved an Unrestricted Power to Amend.
What happened is that Kim contributed her share of certain valuable marital assets, including the couple's home, into the Trust, but the Trust didn't identify Kim by name as a beneficiary. Instead, the Trust named the beneficiaries as "the Settlor during his lifetime", and "the Settlor's spouse", and "the Settlor's issue", etc. Kim apparently didn't realize when she made her transfers that if the couple were to divorce, she would no longer be "the Settlor's spouse" such that she would continue to have a beneficial interest. Kim's fundamental allegation was that Charles thus used the Trust and its confusing legalese to try to cheat Kim out of her share of their marital assets.
The Utah District Court found in Charles' favor, and Kim appealed to the Supreme Court of Utah.
The Important Choice-of-Law Issue
The first substantive question addressed by the Court -- and the one in which we are the most interested -- is whether the laws of Utah or Nevada law would apply.
Charles insisted that the laws of Nevada should apply, since after all the Trust had a Nevada Trustee, and the Trust Agreement clearly provided:
Governing Law. The validity, construction and effect of the provisions of this Agreement in all respects shall be governed and regulated according to and by the laws of the State of Nevada. The administration of each Trust shall be governed by the laws of the state in which the Trust is being administered.
Under Nevada law, the Trust would be deemed to be irrevocable, and Kim would lose. She argued that applying Nevada law would create "a serious inequity" in the distribution of the couple's marital estate.
The Court began its analysis by pointing out that because Utah is the forum state, i.e., the state in which the action was brought, that it's choice-of-law rules would apply in determining whether Nevada or Utah law would be followed.
The Utah choice-of-law rules require the courts to enforce a choice-of-law provision in a trust document, such as the one in the Trust Agreement here. However, there is an exception: The Utah courts need not enforce the trust's choice-of-law provision where "doing so would undermine a strong public policy of the State of Utah."
To determine whether a "strong public policy" would be undermined, a court engaged in a choice-of-law dispute essentially skips ahead in its analysis to look at the different outcomes. Under Nevada law, Kim loses. Under Utah law, as the Court would later discuss in much greater depth, Kim wins. Thus, the question was whether the application of Nevada law, such that Kim would lose, would undermine a strong public policy of Utah.
The Court answer this in the affirmative, since:
Utah as a long-established policy in favor of the equitable distribution of marital assets in divorce cases. * * * Utah has an interest in ensuring that marital assets are fairly and equitably distributed during divorce and that divorcing spouses both retain sufficient assets to avoid becoming a public charge.
To this end, Utah law presumes that property acquired during a marriage is marital property subject to equitable distribution. * * * Thus, to the extent that the Trust corpus contains marital property, Utah has a strong interest in ensuring that such property is equitably divided in the parties' divorce action.
Even Charles admitted that some of the Trust assets had originally been marital property, including the home that Kim deeded into the Trust. Kim claimed that other valuable marital assets had been contributed to the Trust as well. Because Utah had an important interest in seeing that Kim received her fair share, i.e., and equitable distribution of those assets, Utah law would apply.
Dr. Dahl's Reservation of an Unrestricted Power to Amend
Kim argued that the Trust was revocable, because Charles reserved in the Trust Agreement an unrestricted power to amend the Trust. Charles responded that the Trust clearly said that the Trust was irrevocable under the following language in the Trust Agreement:
Trust Irrevocable. The Trust hereby established is irrevocable. Settlor reserves any power whatsoever to alter or amend any of the terms or provisions hereof.
Dr. Dahl argued that under Nevada law, a provision in the Trust Agreement stating that the Trust is irrevocable is conclusive as to the matter; but as we just saw, that is irrelevant since the Court held that Nevada law didn't apply.
Dr. Dahl next argued that, notwithstanding this language, he didn't have any ability to amend the Trust, but rather "the language simply reserves the rights of every settlor of an irrevocable trust ... to amend, alter or terminate the irrevocable trust if there is consent from all beneficiaries." The Court did not buy any of this: "We are unpersuaded."
[By arguing this, Dr. Dahl may have given up a better argument, which was that the reservation language came out wrong because of a typo, i.e., it should have read "Settlor reserves NO power whatsoever to alter or amend . . ." However, since Charles who created the trust was the "drafting party", a presumption would have arisen that the language was correct, and Kim could have asserted that she relied upon the language as written, typo or not, in conveying her share of their marital assets into the trust. But Charles apparently never raised this issue, and at any rate the Court didn't address the issue, it ends up being a non-sequitur for all involved. But if this was a mere drafting error, the failure to include the two letters "no" resulted in a trust catastrophe of epic proportions.]
Of course, Dr. Dahl's reservation of the power to amend meant inevitable disaster, or as the Court noted "By the terms of the Trust, Dr. Dahl can modify any and all Trust provisions, including the provisions that purport to make the Trust irrevocable." Not just Utah law, but trust law widely holds that the settlor's broad power to amend renders a trust revocable:
Footnote 10. See, e.g., Rubinson v. Rubinson, 620 N.E.2d 1271, 1280 (Ill.App.Ct.1993) (recognizing "the long-settled rule and the plethora of cases that have held that where the settlor reserves the unrestricted power to amend a trust, ... that power may be used to terminate the trust"); De Lee, 611 P.2d at 212 ("An unrestricted power to modify ... an intervivos trust includes the power to revoke the trust...."); Manice v. Howard Sav. Inst., 104 A.2d 74, 75 (N.J.Super.Ct. Ch. Div.1954) ("[A]n unrestricted power to modify includes a power to revoke the trust."); Stahler v. Sevinor, 84 N.E.2d 447, 448–49 (Mass.1949) (holding that an unrestricted power to amend includes the power to revoke); see also Restatement (Second) Of Trusts sec. 331 cmt. h ("If the power to modify is subject to no restrictions, it includes a power to revoke the trust."); Charles E. Rounds, Loring: A Trustee's Handbook 384 (2002) ("[I]nherent in the right to amend is the right to insert by amendment into the trust a revocation provision.").
Kim Could Revoke The Trust As To The Assets She Contributed
Although Kim was not a signator to the Trust Agreement, the Court held that Kim was still a Settlor of the Trust to the extent that she contributed property to it. As described in the Uniform Law Comment upon which Utah Code sec. 75-7-103 was based:
Determining the identity of the "settlor" is usually not an issue. The same person will both sign the trust instrument and fund the trust. Ascertaining the identity of the settlor becomes more difficult when more than one person signs the trust instrument or funds the trust. The fact that a person is designated as the "settlor" by the terms of the trust is not necessarily determinative .... Should more than one person contribute to a trust, all of the contributors will ordinarily be treated as settlors in proportion to their respective contributions, regardless of which one signed the trust instrument.
It therefore did not matter that Kim was not named as a Settlor in the Trust Agreement; that she contributed assets to the Trust made her a Settlor to the extent of her contribution. Since Utah law allows a spouse to withdraw her share of the marital property from a revocable trust, Kim had the right to withdraw her share of the personal residence and other valuable marital assets that she contributed (to be determined by the District Court on remand).
Thus the Utah Supreme Court:
Such a result accords with fundamental principles governing marital property under Utah law. Were we to decide that Ms. Dahl had no enforceable interest in the Trust, despite having contributed marital property to it, the result would be to allow a spouse to shield marital property from equitable division in the event of divorce. And that is exactly what Dr. Dahl attempted to do in this case. He crafted a trust agreement purporting to eliminate any interest Ms. Dahl had in the Trust property upon the couple's divorce. But Utah law does not allow spouses to place marital assets in revocable trusts and then shield those assets from equitable property division in the event of a divorce.
The remainder of this lengthy Opinion then goes on to consider the extent to which Kim was entitled to alimony, an issue beyond the scope and focus of this article and which Kim lost on. However, we do get in the Court's final footnote that Kim wasn't exactly represented by the highest quality of counsel, i.e., it was no "hotshot lawyer" that won this result:
But our review of this case leaves us with serious doubts as to the quality of Mr. Christensen's representation of Ms. Dahl. We acknowledge that not all of the facts are before us. But those that are before us evidence a stunning failure to competently represent Ms. Dahl. For example, Mr. Christensen's failure to properly designate expert witnesses and disclose trial exhibits left Ms. Dahl without any expert testimony relating to the division of the marital assets. Mr. Christensen's failure to conduct effective discovery contributed to Ms. Dahl's inability to fully assert her claims to various assets. Counsel's approach to Ms. Dahl's claim for temporary and permanent alimony is especially troubling. Though it was possible that Mr. Christensen's failure to comply with the district court's orders to produce a proper financial declaration was compounded by a lack of cooperation from Ms. Dahl, the record before us suggests the failure was primarily one of counsel. If so, counsel's failure likely cost Ms. Dahl the alimony to which she may otherwise have been entitled.
ANALYSIS
As an initial point, it is important to realize that this case can be distinguished from a traditional asset protection planning case on at least three grounds.
First, attempts by one spouse to misuse a trust to cheat another spouse is nothing but reprehensible. Asset protection planning is about legally taking one's chips off the liability table when there are no creditors lurking; it is nothing about using structures to defraud one out of their rights to marital property, or other legitimate creditors.
Second, this case never involved a challenge to a Domestic Asset Protection Trust (DAPT) in the sense that such trusts are commonly understood to protect assets from creditors. Such a trust anticipates that the creditors that such a trust will work to protect the trust's assets again, are those creditors who are not parties to the Trust but instead are true third-party creditors who have an outside claim against the settlor/beneficiary. Instead, here Kim was asserting her rights as a settlor to the trust, and in that she prevailed; thus, Kim was an "inside creditor" that the DAPTs are not properly meant to protect against.
Third, the Utah Supreme Court ultimately holds that the Dahl Trust was revocable, and of course revocable trusts play almost no role in asset protection planning as it is traditionally understood.
If this case would have stayed at the trial court level, probably nobody would have cared. It was an obscure case, and the District Court's decision didn't even make it on to Westlaw. The odds of the trial court decision becoming important enough to have precedential value elsewhere were non-existent.
Once the Utah Supreme Court released the instant Opinion in the case, however, the case becomes quite important because of the higher court's resolution of the conflict-of-laws issues, which may indeed prove to have precedential value in other states.
A key factor is that Utah is a DAPT state, i.e., Utah adopted legislation in 2003 allowing for the settlor/beneficiary's interest in a self-settled trust to be protected by the trust's spendthrift protection. In 2013, the Utah legislation amended Utah's DAPT's statute to make it even less friendly to creditors.
However, when the Utah Supreme Court issued the instant Opinion in 2015, the Opinion did not purport to weigh Utah's public interest by the fact that it had DAPT legislation on the books. Instead of looking to Utah's trust laws, the Utah Supreme Court looked instead to Utah's marital laws to find that Utah had an overriding public interest in seeing that its laws regarding the division of marital estates was respected.
Stated differently, if even the courts of a DAPT state will not switch the conflict-of-law pointer to the DAPT state, why should one begin to believe even for the slightest moment that the courts of a non-DAPT state would do so?
This is why the Dahl decision amounts to more cumulative evidence that DAPTs are quite unlikely to work for settlor/beneficiaries in non-DAPT states.
Consider the hurdles. First, as the Dahl Court notes, which state's conflict-of-law rules apply is determined by the forum state, i.e., the state were the action is pending. Since the creditor enforcing the judgment against the settlor/beneficiary of a DAPT in the non-DAPT state where the settlor/beneficiary resides, this means that the non-DAPT state's conflict-of-law rules will apply.
Second, that the non-DAPT state has a statute that allows creditors to enforce their judgments against the settlor/beneficiary's interest in a self-settled trust states an important public policy for that state. In fact, in some states, the old common law "per se" rule applies to self-settled spendthrift trusts, which holds that such trusts are void per se.
This very issue came up in the only DAPT case to address the conflict-of-law issue in the context of a true third-party creditor, being Waldron v. Huber (In re Huber), 2013 WL 2154218 (Bk.W.D.Wa., Slip Copy, May 17, 2013), which considered a Washington state resident who was trying to protect his assets in an Alaska DAPT. On the conflict-of-law issue, that Court stated:
“Washington State has a strong public policy against self-settled asset protection trusts"
The issue had actually come up the year before Huber in a Ninth Circuit opinion, though it didn't deal directly with a DAPT issue, in the case of In re Zukerkorn, ___ B.R. ____, 2012 WL 6608887 (9th Cir.BAP (Cal.), Dec. 19, 2012). There, as to the conflict-of-laws issue (between Hawaii law and California law) the Ninth Circuit firmly stated that:
“self-settled trusts are void and against public policy in California”
For more, see my article, "Zukerkorn -- Possible Bad News For Domestic Asset Protection Trusts In Conflict-Of-Laws Dispute" at http://onforb.es/VaTEZK and http://goo.gl/0nWZi
Third, and very importantly, consider which court is going to hear whether the non-DAPT's state interest in allowing creditors to access the debtor's interest in a DAPT satisfies an "important public purpose" -- it is the court of the non-DAPT state, and not just any court in that state, but the very court that is hearing the enforcement of its own judgment against the debtor! Rhetorical question: What court is going to rule on a conflict-of-law issue in such a way as to defeat the enforcement of a judgment that it has worked so hard to enter?
Under these conditions, the odds of the winning the conflict-of-laws dispute, i.e., persuading the court in the non-DAPT state to apply the law of the DAPT state are not quite theoretically impossible, but the odds of it happening are so terribly low that one should never presume that the laws of the DAPT state will apply. Instead, just the precise opposite presumption should be made -- that the laws of the non-DAPT state will almost always apply, meaning that a creditor in a non-DAPT state will almost always be able to cut through the protections of the DAPT under the laws of the non-DAPT state.
Ever since Alaska led the way with its DAPT legislation in 1997, I've been waiting for somebody to offer a cogent technical explanation, supported by statutes and case law, as to why they believe that a DAPT will be able to avoid the application of the local law of the non-DAPT state where the settlor/beneficiary is resident. I'm still waiting.
It is quite telling that after 18 years of DAPT statutes, DAPT promoters still cannot articulate, much less agree upon, a reasonable explanation for why the courts of a non-DAPT state should respect the spendthrift trust protections of the DAPT state. By contrast, it is quite easy to explain why they will not: The local law of the non-DAPT state simply does not by the express terms of its statutes protect the settlor/beneficiary's interest in a self-settled spendthrift trust.
All of which circles us back to the conflict-of-law rules and the importance of the conflict-of-law "pointer" being to the laws of the DAPT state, and not to the laws of the non-DAPT state. If the courts of the non-DAPT state will not move the choice-of-law "pointer" to the laws of the DAPT state, then the DAPT is going down under the laws of the non-DAPT state.
But, as mentioned, the practical odds of the non-DAPT state applying the DAPT state's laws are simply too low to even consider as a reasonable possibility. Yet, in spite of all this, some planners blissfully continue to form DAPTs for settlor/beneficiaries in non-DAPT states, even though they can't say with any true confidence exactly why a DAPT would work there. Go figure.
This is not to say that DAPTs don't "work". They can and should work for the residents of those states which have adopted DAPT laws, at least outside of bankruptcy (the other Achilles' heel for DAPTs). If a person lives in a DAPT state, they can stay out of bankruptcy, and they have no "exception creditors", a DAPT will probably work just fine for them.
It is inside bankruptcy and outside DAPT states where "all bets are off" for DAPTs (or, perhaps more accurately, the smart money is on creditors).
Planners in non-DAPT states are getting more warnings than ever that DAPTs probably will not work for settlor/beneficiaries in non-DAPT states. Professor Jeffrey Pennell of Emory University College of Law has sounded the warning for planners, and some prominent asset protection planners have too. In his 2014 year-end summary of asset protection law, Gideon Rothschild wrote:
In preparation for this year's article, I waded through numerous cases and legislative developments and found many encouraging signs demonstrating that asset protection planning is not only alive and well, but also thriving in many respects. Yet, perhaps the one most sought after development continues to elude me-that of the court's acceptance of self-settled trusts. Since 1997, when Alaska became the first state to enact asset protection trust legislation, I've yet to read a court decision that respects these laws when there's no evidence of a "voidable transfer" (a new term under the Uniform Voidable Transfer Act, replacing the references to "fraud(ulent)."
In fact, the only court decision to address this issue directly was Waldron v. Huber (In re Huber), supra., as I wrote about in my article "Domestic Asset Protection Trust Blows Up Bigger Than Alaska In Huber Case" as found at http://onforb.es/10mIRyB and http://goo.gl/ZI8Jv
The title of my article should tell you how Huber came out if you slept through 2013.
I get that the DAPT folks are frustrated because they've gone so long without DAPTs having anything that could be characterized as a "win". I've heard anecdotally that there were some tough words bandied about at this year's Heckelring Institute as DAPT proponents bristled at certain questions. All that I can counsel is patience, as we wait to see how the law shakes out. Throwing bombs at other planning techniques (there, at offshore trusts) isn't going to make the law regarding DAPTs shake out any faster.
There is, of course, no harm to folks trying to use a DAPT in a non-DAPT state so long as they are aware of the dangers. The only way that we'll ever have any sizeable number of court opinions on this issue is if some folks use them and battle their opponents to an appellate conclusion. Test cases are an integral part of the growth of our laws.
Unfortunately, in the DAPTs that I have reviewed for clients who were resident in non-DAPT states, I've yet to run across a client who was warned about the existence of these issues by their planners. To let clients go into these situations with their eyes wide open is one thing -- after all, clients ultimately make the decisions and not the lawyers, and in asset protection planning no strategy that I've seen yet approaches the perfect -- but to not fully and fairly warn clients of the potential dangers is somewhere between negligence and deceit. I'm sure that there are some ethical and honest planners out there are warning their clients about these dangers, but I've yet to come across one of their DAPT clients.
Again, DAPTs have their uses, but those uses are almost entirely limited to clients living in DAPT states. If somebody living in a DAPT state wants to use one for whatever reason (maybe creditor protection isn't that big of a deal), that's fine so long as they know what they're really getting into. Just don't pull the wool over a client's eyes to close a sale.
Is there a way to read the Dahl opinion in such a way that it can be said to favor DAPTs?
No. No reasonable reading of the Dahl opinion could lead to such a conclusion. While Charles lost on the conflict-of-laws issues because Kim was an "exception creditor" (recalling that Utah had as of the time of the Utah Supreme Court's ruling adopted DAPT legislation too), that does not mean that if Kim had not been an "exception creditor" that she would have somehow lost in a non-DAPT state, since (as discussed above) self-settled trusts are almost always deemed to violate public policy in non-DAPT states. Kim very likely would have won in a non-DAPT state had she been an "exception creditor" or not -- it likely would not have made the least bit of difference, since it is self-settled trusts generally that are against the public policy of non-DAPT states, and not dependent upon the class of creditor (which is irrelevant in non-DAPT states).
Finally, let me climb upon my soapbox and rant for a moment about a fact peculiar to asset protection planning that I personally find quite irritating. That fact is that, for whatever reason, asset protection seems to get a pass when it comes to technical analysis, i.e., technical legal issues are often overlooked in favor of unsubstantiated anecdotal information that isn't worth the proverbial hill of beans in court. If you don't have legal research in your files that tells you with precision exactly why something should (nothing is certain) work from technical legal perspective, then you shouldn't be doing it. But time and time again, I run across planners who are doing something or other for asset protection planning, and they don't really have a clue as to why or how it might actually fare in the crucible of the courtroom, other than they've heard that others are doing it too.
That is not being professional, that is not looking out for the interests of clients, and it needs to stop. Do your own hard research, reach your own hard conclusions, or kindly please go practice in some other area.
Rand endeth.
CITE AS
Dahl v. Dahl, ___ P.3d ____, 2015 UT 23, 2015 WL 404521 (Jan. 30, 2015). Full opinion available at http://goo.gl/Y1bL0O
This article at http://onforb.es/1L3dEsO and http://goo.gl/kDwKsh
