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Limited Partnerships – Advantages and Case Study

Advantages of Limited Partnerships

  • LPs allow for pass-through taxation for both the limited partner and the general partner.
  • Limited partners are not held personally responsible for the debts and liabilities of the business, although the GP, if an individual, may be personally responsible.
  • The general partner(s) have full control over all business decisions, which can be useful in family situations where ownership – but not control – has been gifted to children.
  • Estate planning strategies can be achieved with LPs.
  • Limited partners are not responsible for the partnership’s debts beyond the amount of their capital contribution or contribution obligation. So, unless they become actively involved, the limited partners are protected.
  • As a general rule, general partners are personally liable for all partnership debts. But as was mentioned above, there is a way to protect the general partner of a limited partnership. To reduce liability exposure, corporations or LLCs are formed to serve as general partners of the limited partnership. In this way, the liability of the general partner is encapsulated in a limited liability entity.
  • Because by definition limited partners may not participate in management, the general partner maintains complete control. In many cases, the general partner will hold only 2% of the partnership interest but will be able to assert 100% control over the partnership. This feature is valuable in estate planning situations where a parent is gifting or has gifted limited partnership interests to his children. Until such family members are old enough or trusted enough to act responsibly, the senior family members may continue to manage the LP even though only a very small general partnership interest is retained.
  • The ability to restrict the transfer of limited or general partnership interests to outside persons is a valuable feature of the limited partnership. Through a written limited partnership agreement, rights of first refusal, prohibited transfers, and conditions to permitted transfers are instituted to restrict the free transferability of partnership interests. It should be noted that LLCs can also afford beneficial restrictions on transfer. These restrictions are crucial for achieving the creditor protection and estate and gift tax advantages afforded by limited partnerships.
  • Creditors of a partnership can only reach the partnership assets and the assets of the general partner, which is limited by using a corporate general partner which does not hold a lot of assets.
  • The limited partnership provides a great deal of flexibility. A written partnership agreement can be drafted to tailor the business and family planning requirements of any situation. And there are very few statutory requirements that cannot be changed or eliminated through a well-drafted partnership agreement.
  • Limited partnerships, like general partnerships, are flow-through tax entities.

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Case Study:

When a Limited Partnership is Best

Jim is the proud father of three boys. Aaron, Bob, and Chris are active, athletic, and creative boys almost ready to embark upon their own careers. The problem was that they were sometimes too active, too athletic, and too creative.

At the time Jim came to see me, Aaron was seventeen years old and every one of the seemingly unlimited hormones he had was shouting for attention. He loved the girls, the girls loved him, and his social life was frenetic and chaotic.

Bob was sixteen years old and sports were all that mattered. He played sports, watched sports, and lived and breathed sports.

Chris was fifteen years old and the lead guitarist in a heavy metal band. When they practiced in Jim’s garage the neighbors did not confuse them with the Beatles.

Jim has five valuable real estate holdings that he wants to go to the boys. His wife had passed on several years before and he needed to make some estate planning decisions. But given the boys’ energy level and lack of direction he did not want them controlling or managing the real estate.

Jim knew that if he left the assets in his own name, when he died the IRS would take 55% of his estate, which was valued at over $10 million. And while estate taxes were supposed to be gradually eliminated, Jim knew that Congress played politics in this arena and no certainty was guaranteed. Jim had worked too hard, and had paid income taxes once already before buying the properties, to let the IRS’s estate taxes take away half his assets. But again, he could not let his boys have any sort of control over the assets. While the government could squander 55% of his assets, he knew that his boys could easily top that with a 100% effort.

I suggested that Jim place the five real estate holdings into five separate limited partnerships.

I further explained to Jim that the beauty of a limited partnership was that all management control was in the hands of the general partner. The limited partners were not allowed to get involved in the business. Their activity was “limited” to being passive owners.

It was explained that the general partner can own as little as 2% of the limited partnership, with the limited partners owning the other 98% of it, and yet the general partner can have 100% control in how the entity was managed. The limited partners, even though they own 98%, cannot be involved. This was a major and unique difference between the limited partnership and the limited liability company or a corporation. If the boys owned 98% of an LLC or a corporation they could vote out their dad, sell the assets, and have a party for the ages. Not so with a limited partnership.

The limited partnership was perfect for Jim. He could not imagine his boys performing any sort of responsible management. At least not then. And at the same time he wanted to get the assets out of his name so he would not pay a huge estate tax. The limited partnership was the best entity for this. The IRS allows discounts when you use a limited partnership for gifting. So instead of annually gifting $14,000 tax free to each boy he could gift $16,000 or more to each boy. Over a period of years, his limited partnership interest in each of the limited partnerships would be reduced and the boys’ interest would be increased. When Jim passes on, his estate tax will be based only on the amount of interest he had left in each limited partnership. If he lives long enough he can gift away his entire interest in all five limited partnerships.

Except for his general partnership interest. By retaining his 2% general partnership interest, Jim can control the entities until the day he dies. While he is hopeful his boys will straighten out, the limited partnership format allows him total control in the event that does not happen.

Jim also liked my advice that each of the five properties be put into five separate limited partnerships. I explained to him that the strategy today is to segregate assets. If someone gets injured at one property and sues, it is better to only have one property exposed. If all five properties were in the same limited partnership, the person suing could go after all five properties to satisfy his claim. By segregating assets into separate entities the person suing can only go after the one property where they were injured.

Jim liked the control and protections afforded by the limited partnership entity and proceeded to form five of them.

Is a Limited Partnership right for you? Get your free 15-minute consultation today!

4 Reasons To Use A Limited Partnership Or LLC For Real Estate Investments

After searching the market for the perfect piece of real estate, you have found property that will satisfy your needs and give you future opportunities. It is now time to be concerned about protecting yourself from the risks involved in property ownership. One way to reduce such risks is to hold the property through a limited liability entity. By choosing the entity best suited to your specific situation, you will ensure that you have the flexibility and control that you need.

Although other limited liability entities are available, for the following reasons, the preferred entities for real estate investments are the limited liability company (LLC) and the limited partnership (LP):

1. Protect your Personal Assets from Lawsuits by Tenants, Guests & Trespassers

Limited Liability– As in any business transaction, one of your primary concerns in real estate investment should be your vulnerability. Owning property as an individual or in a general partnership creates unlimited liability. Tenants, guests, and, in some cases, trespassers may sue you for real or imagined grievances. If they prevail, they may seek to use your bank account, home, and personal possessions to satisfy the court’s judgment. By using an LLC or LP for real estate investment, you may be able to avoid personal liability for accidents that occur on the property. Liability will be limited to the extent of the LLC’s or LP’s assets. If anything goes wrong on the property, you will appreciate the protection limited liability provides.

2. Flexible Management Structure, Estate planning and Gifting Opportunities Available

Beneficial Management Structure– Depending upon your specific situation, either an LLC or an LP may provide the management structure you need. An LLC provides a flexible structure that allows members to manage the entity or to elect a manager or a group of managers. All members of an LLC are provided limited liability. Additionally, many states allow one person to form an LLC. On the other hand, LPs require at least one general partner and one limited partner. The general partner is personally liable, but that may be handled by forming a corporation or LLC to serve as general partner, thus encapsulating any liability in a protected entity. When you use an LLC or LP for real estate investment, you may also benefit from estate planning and gifting opportunities available.

3. Avoid Double Taxation

Reduced Taxation on Appreciated Property– Although the structure of a corporation may be familiar, corporations are undesirable for real estate investments. If you hold real estate in an LLC or LP and later decide to sell the property to some third party, the tax benefits of using an LLC or LP will become apparent. Unlike a C corporation, LLCs, LPs, and S corporations allow flow-through tax treatment. Profits are only taxed once, while they are taxed twice in a C corporation. Appreciation on the property will result in less tax in an LLC, or LP. (Compare C corporations and LLCs here)

4. Property Transfers are Less Expensive

In addition, an LLC or LP will provide benefits if you transfer the property to your personal use or the personal use of one of your LP partners or LLC members. Such a transfer to personal use would not result in tax consequences. Although other entities may provide limited liability, the tax consequences of using other entities make an LLC or LP preferable.

Six Ways Joint Ownership Could Cost You

Many people use joint ownership (the holding of title by two or more people), without really thinking about it. It is often used as a substitute for estate planning because it is cheaper, which is why some call it the “poor man’s will”. It may seem like a simple and inexpensive way to avoid probate (the costly court review of your transfers at death), but it is not a good idea in most cases, and can be fraught with unexpected peril. Joint property ownership disputes can really cost you.

What Is Joint Ownership?

Joint ownership occurs when the names of two or more people are placed on bank accounts, stocks, bonds, or deeds to real property. Then, when one of the joint tenants die, the surviving joint tenants own the entire property automatically by operation of law, meaning it happens without going to court or requesting any change. When the first joint owner passes, the survivors own it all regardless of the will of the deceased joint tenant.

The Disadvantages of Joint Ownership

  1. Vulnerable to Creditors
    Joint ownership property is subject to the claims of a joint owner’s creditors. If one joint owner experiences financial difficulties, then his creditors may be able to reach into his interest in the joint ownership property, creating an unexpected co-owner. This new co-owner could, if they wished, file a partition action to force a sale of the property.
  2. Unexpected Use of Joint Ownership Property
    There is nothing to prevent one joint owner from unexpectedly using the joint ownership property for his or her own benefit, thereby eliminating or reducing the value of the joint ownership property to the other owner. For example, you may show up to your vacation home one day and find some unsuspecting B&B guests had it rented to them by the other owner.
  3. Unequal Distributions Among Children
    If the parent of three children adds the name of one of her children to a joint ownership property before passing away, the entire property will pass solely to that one child. What starts out as a matter of convenience (i.e. being able to sign on a bank account), could lead to a family battle royale.
  4. Reconveying Joint Ownership Property is Difficult
    In order to convey joint ownership property back to the original owner, both joint owners must agree, and must be willing to sign the deed and all of the paperwork. If one owner refuses to do so, then reconveying the property to one owner may require a court order.
  5. The Incapacitation of a Joint Owner Could be Devastating
    If one joint owner becomes sick or mentally incapacitated, then it may not be possible to sell the property without the appointment of a guardian and the approval of a probate court. If the sale is approved, the probate court could order that the incapacitated joint owner’s share of the sale be placed in a separate guardianship account to pay for their care, effectively leaving the seller with only one half of the sale proceeds.
  6. Divorce Divisions
    If a joint owner is married, then it is possible that a divorce court might regard the joint ownership property as marital property and award all, or a portion of it, to a joint owner’s soon-to-be ex-spouse.

Examples of Joint Ownership Gone Awry

Case No. 1

John and Martha had been married for many years, but John was in the early stages of dementia. He and Martha began drifting apart. They both agreed that John would live in their marital home for the rest of his days and that Martha would live in another state until John died. Then, after John died, Martha would come back to live in their home. This might well have worked out all right for John and Martha, except that, after Martha was gone, John’s neighbor, Willie, saw a way to make some easy money.

Willie befriended John, and eventually talked John into divorcing Martha. Willie kindly helped John fill out all of his divorce paperwork, and convinced John to swear (falsely) in his affidavit that Martha had deserted him and that he did not even know where she was. The divorce court accepted John’s (Willie’s) lies and granted John a divorce from Martha. John was awarded all of the parties’ martial property, including John and Martha’s marital home.

John’s health steadily deteriorated, and a few weeks before John’s death, Willie convinced John to make him a joint owner of his home, so that he could better help John take care of it.

When John died, Willie became the sole owner of the home automatically, and, being the weasel that he was, Willie immediately borrowed $100,000 from a local bank by mortgaging John and Martha’s home, which was now his.

You can imagine Martha’s surprise when she returned to her marital home and discovered that not only was Willie it’s sole owner, but he was now living in it.

Case No. 2 — The Bad Actions of One Joint Owner Costs Both

After Joyce’s husband passed away, her son Dan offered to help her take care of her home. She made him joint owner of the property so that he could do things like pay utilities. Well, Dan was an idealistic man and held many strong beliefs, including that federal income tax was unconstitutional. True to his convictions, and unbeknownst to Joyce, Dan had not paid any federal income tax for the last ten years. Unfortunately for Joyce, the Internal Revenue Service (IRS) got around to investigating Dan’s finances and discovered his joint property interest in Joyce’s home. The IRS asserted a tax lien against Dan’s interest in the jointly owned property and Joyce was forced to pay back all of Dan’s back taxes to the IRS, together with interest and penalties, in order to continue living undisturbed in her own home.

Case No. 3 — The Need for Guardianship Costs Both

Bill and Mary had been married happily for 58 years. They had always owned their home jointly with the understanding that when one of them passed away, the other would receive the home. Unfortunately, a little after her 87th birthday, Mary was diagnosed with Alzheimer’s disease. Bill wanted to do what was best for his wife, so he decided to sell their home so he could provide care for Mary. It would not be that simple. Because Mary was considered mentally incapacitated, Bill had to hire a probate attorney to set up guardianship for Mary and her estate, and appoint himself as the guardian. He then had to hire the attorney again so he could sell the house. When the house was sold, the probate court ordered Bill to set up a separate account for Mary’s half of proceeds, and every time he wanted to use that money for something, he had to hire his expensive probate attorney and petition the court for approval. This was certainly not what Bill and Mary had in mind for their last few years of life.


Although joint ownership seems like a simple and inexpensive way to avoid probate, it is littered with traps. Luckily, there are other options such as using a living trust or an LLC for asset protection. Call 800-600-1760 to learn more about protecting your property the right way.

9 Rules to Consider Before Signing an Arbitration Provision

By Theodore Sutton

Binding arbitration is becoming a popular method to resolve disputes in real estate transactions. Arbitration provides certain advantages that courts do not. For instance, arbitrations are private, they resolve disputes in a more timely and efficient manner, and they obviously provide a much cheaper alternative to a full-on court trial. While arbitrations provide all these benefits, parties entering a contract must pay special attention to the language written in arbitration clauses. Many undesirable consequences can arise if the language in these clauses is vague and unsatisfactory, such as having unenforceable provisions or prohibiting the use of discovery. While laws differ from state to state (and be sure to consult your own attorney) below are some general issues to be considered before an arbitration provision is signed:

1. Transaction Documentation – The arbitration provisions are required to be included as an alternate dispute resolution matter within the transaction documentation. These provisions should be more general in order to encompass different types of disputes, such as tort and contract disputes. Stand-alone arbitration agreements are more definitive, and may be useful to also be included within the documents related to your specific transaction.

2. Arbitration Commencement – A provision acknowledging that both parties are voluntarily agreeing to an arbitration must be included in the contract. It is also imperative that this provision states that:

  • The parties are knowingly and voluntarily waiving their right to a jury or court trial.
  • Any uncooperative party be compelled to arbitrate through a court order.
  • The arbitration is binding and may not be appealed. (Know that some states don’t provide for exceptions).

3. Arbitrator Selection – These selection provisions must be clearly established so both parties will have a say in selecting the arbitrator, the person deciding your case. This is important because it allows both parties to select either an experienced retired judge or appellate justice, a private attorney or a licensed arbitrator.

4. Rules of Evidence – In some states, arbitrators are allowed to be “arbitrary.” The easiest way to avoid this is to include an arbitration provision that requires the arbitrator to follow to the rules of evidence in legal proceedings.

5. Discovery – Discovery rights (the right to discover the other side’s evidence) must be specified. Otherwise the arbitrator is not required to permit discovery. Specific dates and times must be provided in order for the discovery to be conducted.

6. Court Reporter – Court reporter costs are frequently ignored. One way to prevent this is to share the cost in the contract to avoid disputed fees.

7. Initials – Arbitration provisions must be initialed by both parties within the contract in order for them to be enforceable.

8. Exceptions – Exceptions from arbitration may be included in arbitration provisions. Some common exceptions are foreclosure proceedings, unlawful detainer actions, and injunctive reliefs.

9. Judgment Entry – In some states, it is required to authorize the arbitrator to enter their award as a court judgment.   Arbitration can save your time and money. But as with any legal matter, you want to do it right. This starts with a good contract. Be sure to consult your attorney on arbitration issues. As mentioned, the rules vary from state to state.

Theodore Sutton is a graduate of the University of Utah and will attend the University of Wyoming Law School in the Fall of 2019.

Does Asset Protection Trump the US Constitution?

An Alaska Supreme Court Rules on Alaska Domestic Asset Protection Trusts Created to Protect Assets from a Montana Lawsuit

Court Case: Toni 1 Trust, by Tangwall v. Wacker 2018 WL 1125033

For fraudulent conveyances,

Can one state assert exclusive jurisdiction over another?
Does asset protection trump the U.S. Constitution?

Several years ago Alaska put forth a legislatively strong asset protection statute. It was modeled after the popular asset protection trusts found in the Cook Islands and similarly small Caribbean island nations. These offshore trusts allowed you to both be the grantor (the person setting up the trust) and the beneficiary (the one benefitting from the trust.) Self settled trusts weren’t allowed in old England, the birthplace of common law. They were bad form. You can’t set up your own trust to protect your own assets was the guiding rationale. A ‘self-settled trust’ was akin to cheating. But Britain’s island dependencies needed an industry besides tourism. And the rich needed an island to park their money.

The foreign asset protection trusts became so popular that a number of U.S. states considered them. Alaska was first. Delaware, Nevada and 13 other states followed with their own domestic asset protection trusts (DAPT.) After a holding period where transfers into a DAPT could be challenged (Nevada’s is two years) the trust can’t be breeched or pierced.

Or can it?

In the Toni 1 case (decided on March 2, 2018) the Alaska Supreme Court had to take a hard look at their asset protection scheme. During a Montana lawsuit the Tangwalls transferred Montana real estate to an Alaska DAPT. A Montana court found the transfer was fraudulent under Montana law. (You can’t put assets out of reach once you have been sued or even threatened with litigation.)

Tangwall sought relief in the Alaska court arguing that only Alaska courts had jurisdiction over an Alaska DAPT. But when the transfer of Montana property was involved the Alaska Supreme Court under the full faith and credit clause of the U.S. Constitution could not limit Montana’s jurisdiction.

A full discussion of the case is below. The takeaway, however, is that asset protection-as we’ve noted before-is an ever changing area of the law.


What are the potential impacts of the recent Alaska Supreme Court decision in Toni 1 Trust, by Tangwall v. Wacker 2018 WL 1125033 (Alaska, March 2, 2018), on asset protection trusts?

Applicable Law

Alaska Statue 34.40.110(k) (the “Alaska statue”), which purports to grant Alaska courts exclusive jurisdiction over fraudulent transfer claims against Alaska self-settled spendthrift trusts, cannot unilaterally deprive other state and federal courts of jurisdiction.

The Facts of Toni

After a Montana state court issued a series of judgments against Donald Tangwall and his family, the family members transferred two pieces of property to the “Toni 1 Trust,” a trust allegedly created under Alaska law. A Montana state court and an Alaska bankruptcy court found that the transfers were made to avoid the judgments and were, therefore, fraudulent. Tangwall, the trustee of the Trust, then filed suit in the Alaska state court, arguing that Alaska state courts have exclusive jurisdiction over such fraudulent transfer actions under the Alaska statute. However, the Alaska Supreme Court concluded that this statute could not unilaterally deprive other state and federal courts of jurisdiction, and the Court affirmed the Alaska state court’s judgment dismissing Tangwall’s complaint.

More specifically, in 2007 Donald Tangwall sued William and Barbara Wacker in Montana state court. The Wackers counterclaimed against Tangwall; his wife, Barbara Tangwall; his mother-in-law, Margaret “Toni” Bertran; and several trusts and businesses owned or run by the family. In the ensuring years, several default judgments were entered against Tangwall and his family. In 2010, before the last of these judgments was issued, Bertran and Barbara Tangwall transferred parcels of real property to an Alaska trust called the “Toni 1 Trust” (the Trust). The Wackers filed a fraudulent transfer action under Montana law in Montana state court, alleging that the transfers were made to avoid the judgments. Default judgments in the fraudulent transfer action were entered against Barbara Tangwall, the Toni 1 Trust, and Bertran. After the fraudulent transfer judgments were issued, the Wackers purchased Barbara Tangwall’s interest in one of the parcels at a sheriff’s sale, as part satisfaction of their judgment against Tangwall and family. But before they could purchase the remaining half interest, Bertran filed for Chapter 7 bankruptcy in Alaska. Her interest in the trust property was therefore subject to the jurisdiction of a federal bankruptcy court. In December 2012, Donald Tangwall, as trustee of the Trust, filed a complaint in the bankruptcy court against the Wackers and bankruptcy trustee Larry Compton. Among other things, Tangwall alleged that service on the Trust in the Montana fraudulent transfer action was defective, rendering the judgment against the Trust void. Rather than litigate whether service in Montana was proper, Compton elected to bring a fraudulent transfer claim against Tangwall under the federal bankruptcy fraudulent transfer statute. A default judgment in Compton’s action was entered against Tangwall, who appealed from this judgment of dismissed.

Tangwall next sought relief in Alaska state court, where he filed the complaint that led to his later appeal. The crux of his argument was that the Alaska statute granted courts exclusive jurisdiction over any fraudulent transfer actions against the Trust. Specifically, he argued that the Trust contained a provision restricting the transfer of the beneficiary’s interest, and that the Alaska statute granted Alaska courts “exclusive jurisdiction over an action brought under a cause of action or claim for relief that is based on a transfer of property to a trust” containing such transfer restrictions. On this basis, Tangwall sought a declaratory judgment stating that all judgments against the Trust from other jurisdictions were void and that no future actions could be maintained against the Trust because the statute of limitations had run. The superior court dismissed the complaint, and Tangwall appealed. Most of Tangwall’s arguments on appeal were supported by little or no citation to relevant legal authority and were, therefore, waived. However, he preserved his argument that the state and federal judgments against the Trust were void for lack of subject matter jurisdiction under the Alaska statute.

The Decision in Toni

A. Under the Full Faith and Credit Clause, an Alaska statute cannot prevent Montana courts from applying Montana fraudulent transfer law.

The Alaska Supreme Court concluded that the Alaska statute, AS.40.110(k), which purported to grant Alaska courts exclusive jurisdiction over fraudulent transfer claims against Alaska self-settled spendthrift trusts, could not limit the scope of a Montana court’s jurisdiction over a fraudulent transfer action against a trust allegedly created under Alaska law, and thus, a fraudulent transfer judgment entered against a trust in a Montana court was not void for lack of subject matter jurisdiction. The Alaska Supreme Court noted that fraudulent transfer actions were transitory actions, and the Full Faith and Credit Clause did not compel states to follow another state’s statute claiming exclusive jurisdiction over actions and purporting to deprive other states of jurisdiction over all fraudulent transfer actions concerning Alaska trusts, even if the actions arose under other states’ laws.

B. The Bankruptcy Court’s judgment was based upon a cause of action arising under federal law, and states cannot restrict federal jurisdiction; furthermore, a federal statute specifically grants federal courts jurisdiction over fraudulent transfer claims. 

Likewise, the Alaska Supreme Court concluded that the Alaska statue could not limit the scope of a federal bankruptcy court’s jurisdiction over fraudulent transfer claims against the trustee of a trust allegedly created under Alaska law, and this a fraudulent transfer judgment entered against a trustee in bankruptcy court was not void for lack of subject matter jurisdiction. In addition, the Court noted that the Alaska statue was preempted by the Federal fraudulent conveyance statute, 11 U.S.C. § 548(a)(1)(A), which permits trustees to avoid fraudulent transfers.

The Rationale of Toni

A. The Alaska statute, AK 34.40.110(k), cannot limit the scope of other states’ jurisdiction.

Initially, the Alaska Supreme Court recognized that the Alaska statute, AK 34.40.110(k), purported to grant Alaska courts exclusive jurisdiction over fraudulent transfer claims against Alaska self-settled spendthrift trusts. The Alaska Supreme Court stated that, “having reviewed the legislative history of AS 34.4.0110(k), we have no doubt the Alaska legislature’s purpose in enacting that statute was to prevent other state and federal courts from exercising subject matter jurisdiction over fraudulent transfer actions against such trusts.”

The Alaska Supreme Court noted that, more than 100 years ago, the United States Supreme Court held in St. Louis, Iron Mountain & S. Ry. Co. v. Taylor, 210 U.S. 281, 285, 28 S. Ct. 616, 52 L.Ed. 1061 (1908), that each state may, subject to the restrictions of the Federal Constitution, determine the limits of the jurisdiction of its courts, the character of the controversies which shall be heard in them, and, specifically, how far it will, having jurisdiction of the parties, entertain in its courts transitory actions where the cause of action has arisen outside its borders. The Alaska Supreme Court further noted that, just a few years later, the United States Supreme Court held in Tenn. Coal, Iron, & R.R. Co. v. George, 233 U.S. 354, 360, 34 S.Ct.587, 58 L.Ed.997(1914), that states are not constitutionally compelled to acquiesce to sister states’ attempts to circumscribe their jurisdiction over such actions.

In Tennessee Coal, an employee sued his employer in a Georgia court, relying on an Alabama statutory cause of action. His employer countered that Alabama state courts retained exclusive jurisdiction over the suit under the Alabama Code, and that the Full Faith and Credit Clause compelled Georgia courts to respect Alabama’s assertion of exclusive jurisdiction. The United States Supreme Court found the “Full Faith and Credit” does not require states to go quite so far. Instead, jurisdiction is to be determined by the law of the court’s creation, and cannot be defeated by the extraterritorial operation of a statute of another state, even though it created the right of action.

After discussing the facts of Tennessee Coal, the Alaska Supreme Court concluded that the Alaska statute crossed the limit recognized by Tennessee Coal by purporting to grant Alaska courts exclusive jurisdiction over a type of transitory action against Alaska trusts. Acknowledging that the analogy was imperfect, the Alaska Supreme Court held, nevertheless, that Tennessee Coal controlled. The Alaska Supreme Court pointed out that the Tennessee Coal court held that the Full Faith and Credit Clause did not compel states to follow another state’s statute claiming exclusive jurisdiction over suits based on a cause of action even though the other state created the right of action. The Alaska Supreme Court stated that the clear implication was that the constitutional argument rejected in Tennessee Coal would be even less compelling were a state to assert exclusive jurisdiction over suits based on a cause of action it did not create. Applying this rationale to the facts of Toni, the Alaska Supreme Court observed that, in seeking to void the Montana court’s judgment for lack of jurisdiction, Tangwall effectively was arguing that the Alaska statute could deprive Montana courts of jurisdiction over cases arising under Montana law. The Alaska Supreme Court rejected Tangwall’s argument and stated that it was a more extreme interpretation of the “full faith and credit” principle than the interpretation considered and rejected by the United States Supreme Court in Tennessee Coal.

Finally, the Alaska Supreme Court noted that the basic principle articulated in Tennessee Coal had not changed in the last century, and concluded, therefore, that the Alaska statue’s assertion of exclusive jurisdiction did not render a fraudulent transfer judgment against an Alaska trust from a Montana court void for lack of subject matter jurisdiction.

B. The Alaska statue, AK 34.40.110(k), cannot limit the scope of a federal court’s jurisdiction.

Similarly, the Alaska Supreme Court denied Tangwall relief from the federal judgment. The Alaska Supreme Court noted that, while Tennessee Coal addressed only a state’s ability to restrict the jurisdiction of its sister states, the more recent United States Supreme Court decision in Marshall v. Marshall, 547 U.S. 293, 314, 126 S.Ct. 1735, 164 L.Ed 480 (2006), had confirmed that the Tennessee Coal rule also applied to claims of exclusive jurisdiction asserted against federal courts.

In Marshall, the United States Supreme Court considered whether Texas probate courts could retain exclusive jurisdiction over a transitory tort arising under Texas law. Relying on Tennessee Coal, the court concluded that they could not, and that state efforts to limit federal jurisdiction were invalid, even though the state created the right of action giving rise to the suit.

Acknowledging that the analogy was imperfect, the Alaska Supreme Court held, nevertheless, that just as Tennessee Coal should control whether the Alaska statute could restrict state court jurisdiction, Marshall should control whether the Alaska statute could restrict federal court jurisdiction. The Alaska Supreme Court concluded that, just as a state could restrict federal jurisdiction, even though the state created the right of action, a state also could not restrict federal jurisdiction over suits based on a cause of action it did not create. In addition, the Alaska Supreme Court pointed out that, if the Alaska statute were interpreted to deny parties access to the federal courts without those courts’ consent, then the statute might well run afoul of the Supremacy Clause, which ultimately precludes state courts from limiting federal jurisdiction.

Observations by the Alaska Supreme Court in Toni

A. Observations on related state court decisions.

In reaching its decision in Toni, the Alaska Supreme Court acknowledged that the Alaska legislature’s attempt to grant Alaska courts exclusive jurisdiction over a class of claims in some circumstances was hardly unique, and that several other sister states had concluded that similar statutes do, in fact, restrict their jurisdiction. See, e.g., Carbone v. Nxegen Holdings, Inc., 2013 WL 5781103, at *4-5 (Conn. Super,. Oct. 3, 2013); Wilson v. Celestial Greetings, Inc., 896 S.W.2d 759, 761-62 (Mo.App.1995); State ex rel. U.S. Fid. & Guar. Co v. Mehan, 581 S.2d 897, 840 (Mo.App. 1979); Foti v. W. Sizzlin Corp., 2004 WL 2848398, at *1-2 (Va.Cir., Feb. 6, 2004).

The Alaska Supreme Court noted that those courts relied on reasoning that was not applicable to the Alaska statute. For example, the Alaska Supreme Court pointed out that some state courts had applied state-law distinctions between local and transitory action to make discretionary decisions whether to stay or dismiss an action in favor of another forum. However, the Alaska Supreme Court observed that Tennessee Coal had established that a state cannot create a transitory cause of action and at the same time destroy the right to sue on that transitory cause of action in any court having jurisdiction, which suggested that states are not barred from asserting exclusive jurisdiction when the cause of action is local rather than transitory; that the Alaska statute granted Alaska courts exclusive jurisdiction over fraudulent transfer actions against Alaska trusts; and that fraudulent transfer actions were transitory actions.

In addition, the Alaska Supreme Court pointed out that other state courts had declined to hear cases on the basis of an exclusive jurisdiction provision without addressing the Tennessee Coal rule. For example, in Foti, supra, a Virginia Circuit Court elected to respect an assertion of exclusive jurisdiction because “comity suggests that limitations one state’s legislature places on its own laws be universally acknowledged.” However, the Alaska Supreme Court noted that comity is not a legal rule; rather it is a principle under which the courts of one state give effect to the laws of another state out of deference or respect. In other words, while courts may elect to follow a statute like the Alaska statute out of comity, they are not compelled to do so. Furthermore, the Alaska Supreme Court pointed out that the Alaska statute is more than a limitation Alaska’s legislature placed on its own laws; instead, it purports to deprive other states of jurisdiction over all fraudulent transfer actions concerning Alaska trusts, even those based on causes of action arising under that state’s own law.

Finally, the Alaska Supreme Court noted that in IMO Daniel Kloiber Dynasty Trust, 98 A.3d. 924 (Del.Ch.2014), the Delaware Court of Chancery had concluded that Delaware could not unilaterally preclude a sister state from hearing claims under that state’s law, citing Tennessee Coal.

B. Observations on similar related court decisions.

In reaching its decision in Toni, the Alaska Supreme Court noted that several federal courts had concluded that state law “exclusive jurisdiction” provisions did, in fact, deprive them of jurisdiction. See, e.g., Lynch v. Basinger, 2012 WL 6213781, at *5(D.N.J.,Dec. 12, 2012); Yale S. Corp v. Eclipse Servs., Inc., 2010 WL 2854687, at *3-4 (ND.Okla., July 19, 2010); Reserve Sols., Inc. v. Vernaglia, 438 F.Supp.2d 280, 288-89 (S.D.N.Y 2006). However, the Alaska Supreme Court pointed out that only one of these cases was reported, and that none of them addressed either Marshall or Tennessee Coal. Furthermore, the Alaska Supreme Court pointed out that other federal courts had reached the opposite conclusion. See, e.g., Superior Beverage Co. v. Schieffelin & Co., 448 F. 3d 910, 917 (6th Cir. 2006)(“a state may not deprive a federal court of jurisdiction merely by declaring in a statute that it holds exclusive jurisdiction”); Begay v. Kerr-McGee Corp., 682 F.2d 1311, 1315 (9th Cir. 1982) (states “have no power to enlarge or contract the federal jurisdiction”), quoting, Markham v. City of Newport News, 292 F.2d 711, 716 (4th Cir.1961); Duchek v. Jacobi, 646 F.2d 415, 419 (9th Cir. 1981)(same). The Alaska Supreme Court state that the reasoning in these latter cases was both persuasive and consistent with the approach set out in Marshall.

Brief Discussion

The following observations apply to the Alaska Supreme Court’s decision in Toni:

1. To date, sixteen (16) states have enacted asset protection trust legislation, and thirty-four (34) states have not. As such, conflict of law questions may arise concerning the ability of an asset protection trust to protect trust assets from the claims of a trust settlor’s creditors.

2. Toni involved a blatant fraudulent transfer of property to an asset protection trust. The transfers in Toni were made only after most of the default judgments were already entered by the Montana state court.

3. All fifty (50) states, including Alaska, interdict the fraudulent transfer of property. Indeed, Alaska statute AK 34.40.110(b) specifically provides that, “[i]f a trust contains a transfer restriction allowed under (a) of this section [asset protection trusts], the transfer restriction prevents a creditor existing when the trust is created or a person who subsequently becomes a creditor from satisfying a claim out of the beneficiary’s interest in the trust unless the creditor is a creditor of the settlor and…the settlor’s transfer of property in trust was made with the intent to defraud that creditor…”

4. It may be advisable to use a foreign asset protection trust rather than a domestic asset protection trust.

5. Asset protection trust works better when the settlor is a resident in the state with asset protection legislation.

6. Asset protection trust work better when the action is outside of bankruptcy.

7. Asset protection trusts work better when the settlor can avoid personal jurisdiction in a state without asset protection legislation.

8. Asset protection trusts work better when the asset transfer occurs more than ten (10) year limitation period set forth in 11 U.S.C. § 548(e).

9. The federal bankruptcy courts may not always recognize the asset protection features of a state with asset protection legislation, because these assets generally are regarded as property of the bankruptcy estate under 11 U.S.C. § 541.

10. The bankruptcy trustee always is free to commence a fraudulent transfer action under 11 U.S.C. § 548, assuming that the transfer to the asset protection trust occurred within ten (10) years prior to the commencement of the bankruptcy case.


Although states with asset protection legislation may purport to hold exclusive jurisdiction over asset protection trusts, this may not always be true when another state has personal jurisdiction over the debtor. However, as long as the funding of an asset protection trust is not voidable, it does not appear that the decision in Toni damages the usefulness of asset protection planning; rather, the decision in Toni stresses the importance of asset protection planning well before the need for an asset protection trust arises.

Five Steps for Real Estate Asset Protection

When purchasing real estate, it’s critical to protect ourselves and our possessions from lawsuits. We live in the most sue-happy society, in one of the most litigious times, and you need to protect yourself. One way to help prevent people from obtaining all your assets is to take precautions and think ahead, in order to ensure all your life treasures are secure. When a lawsuit is filed against you or your business, all your personal assets like you car, house, equity in your house, and bank accounts are at risk to be taken away. Here are a few ways to help ensure your real estate and personal possessions will be protected and secure.

1. Set Up Your LLC to Hold Your Real Estate

Let’s imagine you are purchasing 4-plex for an investment and will be renting it out for profit. When setting up your entity, make sure it is structured properly to hold the title of the real estate. An excellent entity for real estate is a Limited Liability Company (LLC). When you set up your LLC be sure that is it holding the title of your 4-plex. This structure also helps protect all your personal assets. For example, if a tenant of that 4-plex sues for falling on the property and wins the court case, they are not able to acquire all your personal assets like your bank account, the equity in your home, and all your other assets because the 4-plex is owned by the LLC. They are only able to access the assets in the LLC.

However, if you personally owned the 4-plex and did not set up an LLC to keep your assets separate, you could be vulnerable to unlimited personal liability, and you could be personally responsible for paying back whatever the court awards to the tenant for compensation. For some, that could mean bankruptcy. This is why it’s valuable to set up LLCs for protection.

2. Properly Maintain Your LLC

In order for your LLC to protect you from claims, you must maintain it much like taking care of a garden. Taking care of your garden by watering and feeding it properly is the best way for it to survive and keep it producing food for you. In order for your LLC to survive and keep protecting you, you must pay the annual fee to the state, ensure that minutes are being kept at meetings, and there needs to be a resident agent to accept service of process, or notice of a lawsuit. If you do not follow these easy steps, your business entity will lose its good standing, it will not be able to protect you as you could be vulnerable to piercing the corporate veil, and all your business and personal assets could be taken if a legal decision is decided against you. However, if you follow these steps you will be properly protected.

3. Segregate Your Assets

When creating your LLC, it is important to keep in mind that people are still capable of obtaining all your assets within that LLC. So why put all eggs in one basket? Instead separate your assets into different LLCs to act as a safety net, and ensure they aren’t able to obtain all of your real estate investments or company assets.

4. Get a Wyoming LLC to Hold Your Other LLCs

Certain states have different regulations on LLCs that can offer more protection, so why not take advantage of that? Wyoming is special in that it has great asset protection, great charging order protection, and it doesn’t list your name on the internet. Wyoming LLCs can own other LLCs established in other states. Not only does it have these great benefits, but it also has one of the most affordable state fees. Corporate Direct has also identified a way to ensure that the more preferable protections of Wyoming’s state laws take precedence over other state laws. This is a service we offer through our copyrighted legal language that is not available from any other company or law firm. We call it Armor8® . Learn more about our ultimate Wyoming LLC protection.

5. Use Equity Stripping

Another method of protecting assets is ‘equity stripping,’ sometimes called equity transfer.  With equity stripping you protect your equity by encumbering the property itself. Debt is a form of asset protection. The more debt, the less equity, the lesser chance of litigation. Since debt is asset protection, why not create the debt yourself? This can be done several ways such as spousal transfers, using your property as collateral, obtaining a secured line of credit, and a technique called cross-collateralization. Cross-collateralization is a term used when the collateral for one loan is also used as collateral for another loan. If a person has borrowed from the same bank a home loan secured by the house, a car loan secured by the car, and so on, these assets can be used as cross-collaterals for all the loans.