In a recent post, I wrote about what cautions to take when establishing an asset protection trust that relies on law other than the law of your home state. As I mentioned in the post, because jurisdictional issues are very tricky, it’s often better to rely on traditional common law rather than out-of-state asset protection laws.
Some clients do make the informed decision to proceed with a DAPT nonetheless. In the aforementioned post, I reviewed techniques I recommend to at least minimize jurisdictional risks.
One of the main pieces of advice of the previous post was:
Choose a Trustee Carefully. Rather than choose a large well-known trustee that does business in many states, try to choose a trustee with as few contacts outside of Delaware as possible. To further avoid any accusation that the trustee “does business” outside of Delaware, you should also sign all trust documents in the Delaware office of the trustee. All of these factors reduce the chances that a New Jersey court can exercise in personam jurisdiction over the trustee. To see an example where taking these precautions worked, see First American Bank of Va. v. Reilly, 563 N.E.2d 142 (In. Ct. App. 1990). In Reilly, an Indiana court held that it had no jurisdiction over a Virginia bank acting as trustee, despite the grantor of the trust being an Indiana resident. We have no New Jersey case quite as clear on the issue as Reilly, but Rector v. Rector, 62 N.J. 577 (1973), does stand for the proposition that a trust cannot be brought into a New Jersey suit unless the trustee has “minimum contacts” with New Jersey.
In this post, I wanted to highlight a recent case which demonstrates the importance of jurisdiction over a trustee. Weitz v. Weitz, 2012 N.Y. Slip Op. 30767 (N.Y. 2012) involved an offshore asset protection trust. While I don’t normally recommend offshore trusts due to the risks of criminal contempt (which I will discuss in a future post), the principles behind choosing a DAPT trustee with as few contacts outside Delaware as possible are the same as the principles behind choosing an offshore trustee with as few contacts outside the Cook Islands as possible. Therefore, the case is instructive when dealing with DAPTs.
Weitz involved a New York court attempting to exercise jurisdiction over a well-known trustee (Southpac) located in the Cook Islands. Southpac had no offices or other presence in New York. The court ruled that even though Southpac was offshore, it became subject to New York jurisdiction by receiving fraudulently transferred funds which related to New York litigation.
Receiving funds which were at the time involved in ongoing New York litigation is an extremely minimal level of contact with New York, and yet the court still found jurisdiction. Under this theory of jurisdiction, it becomes especially important not to transfer any funds involved in any ongoing litigation into a DAPT located out of state. Participation in such a transfer alone seems to create jurisdiction over a trustee. If a contact so minimal created jurisdiction, it’s easy to see why choosing a trustee with as few outside contacts as possible is important.
It’s also interesting to see the Plaintiff’s other legal theory for attempting to exercise jurisdiction over Southpac: “the Court’s exercise of personal jurisdiction over Southpac is warranted in light of the interactive nature of its website which ‘invites and promotes the very transfers that are the subject matter of this fraudulent conveyance litigation.’” While the Court found it unnecessary to rule on this point (having already found jurisdiction due to the fraudulent transfer), it may be a good idea to avoid trustees which actively solicit out-of-state business in case a later court is persuaded by such a theory.
If you have any questions about DAPTs, choosing a trustee, or jurisdiction, feel free to contact me
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