Asset protection and dynasty trusts

The High Court possibly expressed in dicta that it would not sanction abusive practices in creating these trusts, and its decision perhaps was based on this philosophy. The legislature of the Cook Islands rapidly modified its governing law concerning these trusts by way of the International Trusts Amendment Act 1995-96, which became effective on November 21, 1996. That Act changed the provisions of the prior law on which the High Court based its creditor-friendly opinion and made several other changes.

B. Judgment Against Trust and Not Settlor

Another question is whether the Alaska, Delaware, Nevada, or Rhode Island courts would enforce the judgment of another state, not against the settlor, but against the trustee and the trust assets. Supporters of the Alaska, Delaware, Nevada, and Rhode Island Acts point to two cases to counter this.

In Hanson v. Denckla199 the U.S. Supreme Court upheld the decision of a Delaware trustee to refuse to enforce the order of a Florida court. In Hanson, a Pennsylvania resident established a trust, naming a Delaware trustee. The settlor moved to Florida, where he died. The widow attempted to exercise certain powers of appointment over the trust. The children disputed the validity of the exercise of the power, and the Florida court entered an order mollifying the exercise of the power. The family then went to Delaware to have the order enforced. The Delaware trustee declined, arguing that the full faith and credit clause was inapplicable because the Florida court lacked jurisdiction over the Delaware trustee and the trust assets.

In Baker v. General Motors,"' the U.S. Supreme Court held that Missouri courts were not bound to enforce a Michigan judgment prohibiting testimony from a particular witness when the parties to the Missouri action had no connection to the Michigan courts.202

X. ATTACK ON SPENDTHRIFT PROTECTION FOR THIRD PARTY BENEFICIARIES

On October 9, 1997, in Sligh v. First National Bank of Holmes County,2"3 the Supreme Court of Mississippi undermined the protection conferred by a spendthrift trust by ruling that the assets of a spendthrift trust may be reached by a beneficiary's tort creditors.

With the decision in Sligh, Mississippi joined Georgia and Louisiana to become the third jurisdiction in the country to carve out an express exception to the spendthrift trust doctrine for tort creditors and became the first to do so by judicial opinion. By statute, Georgia and Louisiana allow tort creditors to reach a beneficiary's interest in a spendthrift trust.204 However, in March 1998, the Mississippi legislature passed the Family Trust Preservation Act of 1998,2s which overturns Sligh.

All practitioners who routinely rely on spendthrift clauses to shield trust assets from a beneficiary's creditors should take note of Sligh. Even though a statute has now overturned the case, the case stands as precedent that other jurisdictions might follow. If followed by other states, the decision could herald a significant erosion of the spendthrift trust doctrine.