Presentation at IICLE\'s Asset Protection Seminar October 8, 2010

1. Asset Protection Planning with Trusts
by
Natalie M. Perry
Asset Protection Trusts are used to protect assets in today’s increasingly
litigious environment. Types of Asset Protection Trust (“APT”)
1. Onshore Trust
2. Offshore Trust
Self Settled Trusts
When a settlor creates a spendthrift trust for third party beneficiaries, the
settlor can generally protect the trust assets from the creditors of the trust
beneficiaries. However, the settlor cannot obtain the protection from creditors for
himself, even if the trust has a spendthrift clause.
Domestic Asset Protection Trusts
Domestic APT Jurisdictions
A. A domestic APT is a self-settled trust created under state law in
which the settlor retains limited rights but which cannot be reached
by the creditors of the settlor. The number of states that have
enacted APT statutes has grown significant since 1997 when the
Alaska statute was enacted.
B. In 2010, the following U.S. jurisdictions have APT statutes:
Alaska1 Delaware2
Missouri3 Nevada4
Oklahoma5 Rhode Island6
South Dakota7 Tennessee8
Utah9 Wyoming10
C. Alaska. The Alaska Trust Act took effect on April 2, 1997 (the
“Alaska Act”).
1. Requirements. To create a valid trust under the Alaska Act,
the following conditions must be met:

2. a. prior to creating the APT, the settlor must sign a
solvency affidavit;
b. at least some of the trust assets must be deposited in
Alaska;
c. at least part of the trust administration must take
place in Alaska;
d. the settlor must use an Alaska resident or an Alaska-
headquartered bank or trust company as trustee or
co-trustee; and
e. the duties of the trustee shall include (on an exclusive
or non-exclusive basis): (i) maintaining books and
records of the trust in Alaska and (ii) preparing or
arranging for preparation of the trust tax return.
2. Trust Agreement. The written trust agreement creating the
Alaska trust must be: (i) irrevocable, (ii) must expressly state
Alaska law governs validity, construction and administration
of trust, (iii) must contain a spendthrift clause, and (iv) must
appoint an Alaska trustee.
3. Exceptions. A creditor is able to access the trust’s assets in
order to satisfy his creditor’s claim if:
a. the creditor can prove the transfer was made with an
intent to defraud that creditor (claim must be filed
within appropriate limitations period as discussed
below);
b. the settlor may revoke or terminate all or part of the
trust without the consent of a person who has a
significant adverse beneficial interest in the trust
(other than (i) a power to veto trust distributions; (ii) a
testamentary non-general power of appointment; or
(iii) a right to receive a distribution from the trust in the
discretion of a person, including the trustee, other
than the settlor);
c. the trust mandates the distribution of all or part of the
trust’s income or principal, or both, to the settlor; or
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3. d. at the time of transfer, the settlor is in default by 30 or
more days of making a payment due under a child
support judgment or order.
The Alaska Act does not contain an exception for claims by
existing or former spouses or for tort claims that existed
when an APT was created.
4. Creditor Claims. A creditor must provide the transfer to the
APT was fraudulent by a preponderance of the evidence.
The limitations period depends on whether the creditor’s
claim existed at the time of the transfer to the APT.
a. Existing Creditor. A creditor whose claim existed prior
to the creation of the APT can attach trust assets only
if he or she files a court action against the settlor
within the later of 4 years after the transfer of assets
to the trust or one year after the transfer was or could
have been reasonable discovered by the creditor.
b. Future Creditor. For a creditor whose claim arose
after the creation of the APT, the claim will be
extinguished unless the creditor brings an action
within 4 years after the transfer is made.
D. Delaware
Delaware was the second state to enact legislation allowing
domestic APTs. The Delaware Qualified Dispositions in Trust Act
(the “QDTA”) became effective on July 1, 1997.
1. Requirements. In order to create a Delaware APT, the
following provisions must be included in the trust agreement:
a. the trust must be an irrevocable trust that contains a
spendthrift clause;
b. the trust must appoint a “qualified trustee” which
means at least one Delaware trustee (other than the
settlor) which can be an individual residing in
Delaware or a corporation that is authorized to
conduct trust business in Delaware and is regulated
by the Delaware Bank Commissioner or a federal
agency; and
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4. c. Delaware law must govern the trust’s validity,
construction, and administration.
Additionally, the Delaware trustee must maintain or arrange
for custody in Delaware of some of the trust property,
maintain records for the trust, prepare or arrange for the
preparation of fiduciary income tax returns, or otherwise
“materially participate” in the administration of the trust.
2. Powers of Settlor. The QDTA permits the settlor to retain the
power to:
a. veto distributions from the trust;
b. consent to or direct investment changes; and
c. replace trustees or advisers with persons who are not
related or subordinate to the trustor within the
meaning of I.R.C. §672.
3. Interests of Settlor. The QDTA expressly authorized the
settlor to have:
a. the ability to receive income or principal pursuant to
broad discretion or a standard as determined by
Delaware trustees, non Delaware trustees and/or
advisers;
b. the right to receive current income distributions;
c. retain a non-general power of appointment.
3. Other Advisors. The QDTA allows the settlor to appoint
additional fiduciaries to critical roles that are vested in
individuals or entities other than the Delaware-based trustee.
a. The settlor may act as advisor to the APT with
exclusive investment authority, or may name another
individual to act as such investment advisor.
b. The settlor may retain the right to remove a trustee or
advisor and to appoint a new trustee or advisor,
provided that the appointees are not related or
subordinate to the settlor within the meaning of Code
Section 672(c).
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5. c. The settlor may vest the distribution discretion in an
advisor (or a group of advisors) who will direct the
trustee regarding distributions.
4. Planning pointer. Under the QDTA, the settlor should not
have any powers other than the interests and powers
described above. Note that adding a non-Delaware co-
trustee or advisor may increase the APT’s vulnerability to
process in jurisdictions where the courts might not apply
Delaware law. This could result in the APT’s invalidation.
5. Creditor Claims.
a. Existing. For creditors existing at the time of the
transfer to the APT, the period runs until the later of
four years from the time of the transfer or one year
from the time the creditor could reasonably have
discovered the existence of the APT. The creditor
must prove by clear and convincing evidence that the
settlor’s transfer was fraudulent within the meaning of
the QDTA.
b. Future. Generally, a creditor holding a future claim
has a four-year period during which it can assert its
claim of a fraudulent transfer. The creditor must prove
that the trust was created with actual intent to defraud
(not hinder or delay) that creditor.
6. Exceptions. The QDTA also created two classes of creditors
whose claims will not be extinguished at the expiration of the
limitations period and who do not have to prove that the
settlor’s transfer was fraudulent.
a. A spouse or child with a claim for unpaid alimony,
child support or a share of marital property can satisfy
his or her claim out of trust assets irrespective of the
time or the circumstances under which the transfer to
the trust occurred. However, only a person married to
the settlor on or before the transfer to the trust
qualifies as a “spouse.”
b. A person with a claim for death, personal injury or
property damage that occurs on or before the date of
the transfer to the APT may satisfy his claim out of
trust assets if the claim arose out of the settlor’s act or
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6. omission or the act or omission of someone for whom
the settlor is vicariously liable.
Also note that a person with a claim for death,
personal injury or property damage that predates a
transfer to a Delaware APT may satisfy his claim out
of trust assets if the claim arose out of the settlor’s act
or omission or the act or omission of someone for
whom the settlor is vicariously liable.
E. Missouri.
1. In 1986, Missouri amended its spendthrift statute to become
the first state to permit settlors of trusts to obtain spendthrift
protection if the transfer to the trust was not fraudulent. The
statute currently provides that the settlor’s creditors may
satisfy claims from the trust assets to the extent of the
settlor’s beneficial interest, if at the time the trust was
established or amended:
a. the settlor was the sole beneficiary of the trust;
b. the settlor retained the power to revoke or amend the
trust; or
c. the settlor was one of a class of beneficiaries and
retained a right to receive a specific portion of the
trust’s income or principal.
2. However, decisions by federal courts in Missouri called the
effectiveness of the statute into question.11
3. On July 9, 2004, the Missouri legislature reaffirmed its
recognition of APT’s by clarifying that with respect to an
irrevocable trust with a spendthrift provision, the spendthrift
provision will prevent a settlor's creditors from satisfying
claims from the trust assets. Two exceptions, similar to the
prior law, were provided:
a. Spendthrift protection is not provided if the transfer of
assets to the trust is fraudulent.
b. Spendthrift protection is not provided if the settlor is
the sole beneficiary of the income or principal of the
trust, retained the power to amend the trust or if the
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7. settlor is one of a class of beneficiaries and retained a
right to receive a specific portion of the income or
principal of the trust.
4. Thus, under Missouri law, if there is more than one
beneficiary of the trust, the settlor is a discretionary
beneficiary of the income or principal, and the trust contains
a spendthrift provision, spendthrift protection will be given to
the settlor of a trust.
5. The Missouri law is less restrictive than the laws of other
APT jurisdictions because, for example, a Missouri trustee is
not required.
F. Nevada.
1. On October 1, 1999, the Nevada legislature enacted the
Spendthrift Trust Act of Nevada (the “Nevada Act”). The trust
agreement that creates the Nevada spendthrift trust must
satisfy the following conditions:
a. the trust must be irrevocable;
b. all or part of the corpus of the trust must be located in
Nevada;
c. the settlor must be domiciled in Nevada; and
d. an individual resident of Nevada or a trust company or
bank that maintains an office in Nevada must be
appointed as trustee.
2 Retained powers. When creating a Nevada APT, the
settlor may retain the following powers:
a. the power to veto trust distributions:
b. a testamentary limited power of appointment;
c. the ability to receive a distribution from the trust in
the discretion of an individual other than the
settlor;
d. the power to remove or replace a trustee;
e. the power to direct the investments of the trust and
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8. other management powers; and
f. the ability to have trust property used to obtain a
loan secured by a mortgage on such property;
3 Creditor Claims. A creditor may be able to reach the
assets of a Nevada APT if he can prove that the
transfer to the trust was fraudulent pursuant to
Nevada law or was otherwise wrongful as to the
creditor.
e. Existing. An existing creditor must bring an action
within two years after the trust’s creation or, if later,
within six month after the creditor discovers (or
reasonably should have discovered) the trust.
f. Future. A creditor whose claim arose after the APT
was created must bring an action within two years of
the creation of the trust.
The Nevada Act does not contain a specific exception for
claims by spouses, minor children or for tort claims.
G. Oklahoma.
2. The Oklahoma legislature passed the Family Wealth
Preservation Trust Act on June 9, 2004. Under this Act, it is
possible for a revocable trust to receive creditor protection.
To achieve creditor protection, the trust must be established
under Oklahoma law. It must have an Oklahoma based
bank or trust company as trustee or co-trustee. The trust
must provide that the income from the trust assets is subject
to income tax in Oklahoma. The only permissible
beneficiaries of the trust are:
a. The spouse of the settlor;
b. Lineal ancestors and descendants of the grantor or
the grantor’s spouse (including descendants adopted
under 18);
c. Issue of deceased natural children or grandchildren;
and
d. A charitable organization.
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9. 3. The APT may only be funded with Oklahoma assets, which
include a security issued by an Oklahoma-based company, a
bond or other obligation issued by the State of Oklahoma or
other municipalities, an account in an Oklahoma based
bank, and real property located in the state of Oklahoma. If a
portion of the trust assets are non-Oklahoma assets, the
trustee must be given a reasonable period in which to
replace the assets with Oklahoma assets.
4. An Oklahoma APT may be funded with up to $1 million. In
addition, the Act will protect any incremental growth derived
from income retained by the trustee above $1 million.
H. Utah. The Utah APT law became effective on December 31, 2003.
1. Requirements. To create an APT under Utah law, the settlor
must use as trustee (i) a Utah depository institution or its
wholly owned subsidiary, or an out-of-state depository
institution authorized to engage in business as a depository
institution in Utah, (ii) a corporation, including a credit union
service organization, owned entirely by one or more federally
insured depository institutions, (iii) a direct or indirect
subsidiary of a depository institution holding company that
also has a direct or indirect subsidiary authorized to engage
in business as a depository institution in Utah, or (iv) any
other corporation continuously engaged in the trust business
in Utah since before July 1, 1981.
2. Limitations. A creditor is able to reach the trust assets to the
extent necessary to pay his or her claim under the following
conditions:
a. The transfer was to defraud a creditor.
b. The trust is revocable without the consent of a person
with a substantial adverse interest in the trust.
c. At the time of the transfer, the settlor or beneficiaries
were in default by 30 or more days in making a
payment due under child support judgment or order.
d. The transfer renders the settlor or beneficiary
insolvent under the transfer.
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10. e. At the time of the transfer, or any time thereafter, the
person receives public assistance and recovery is
allowed the medical benefits recovery act.
f. The settlor is or becomes subject to a state claim or
tax.
Taxation of APT’s
I. Federal Income Tax.
1. Generally, both domestic and offshore trusts will be
structured as grantor trusts during the settlor’s lifetime.
2. Under Code Section 677, an APT should be treated as a
grantor trust, if either the settlor or the settlor’s spouse is a
discretionary beneficiary of income. Code Section 677(a)
states that a settlor is treated as the owner for income tax
purposes of any portion of a trust that can be distributed to
the settlor or the settlor’s spouse, regardless of whether it is
actually distributed.
3. If the grantor does not want to be taxed on the income
earned by the APT, the trust can be structured so that
income distributions require the consent of a beneficiary with
an adverse interest in trust income, such as a remainder
beneficiary.
Domestic Trusts - State Income Tax.
1. If the APT is taxed as a grantor trust for federal income tax
purposes, it will be taxed as a grantor for state income tax
purposes. If the APT is not grantor for income tax purposes but is
an independent tax paying entity, then the selection of a state in
which to establish an APT may depend, in part, on how that state
taxes trust income. The trust income tax rules for the following
APT states are summarized below.
a. Alaska. No income tax.
b. Delaware. No income tax (assuming no Delaware
beneficiaries).
c. Missouri. Tax on the trust income if the trust was
created, or consists of property contributed, by a
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11. person domiciled in Missouri on the date the trust
become irrevocable if, on the last day of the taxable
year, at least one income beneficiary of the trust is a
resident of Missouri.
d. Nevada. No income tax.
e. Rhode Island. No tax on income allocated to non-
resident beneficiaries. Tax on income allocated to
resident beneficiaries of a trust created by a resident
but only (i) while the settlor continues as a resident or
(ii) after death if the settlor was then a resident.
f. Utah. Tax on income of (i) a trust, or portion of a
trust, consisting of property transferred by will of a
decedent who was domiciled in Utah at death, and (ii)
a trust that is administered in Utah. A trust is
administered in Utah if (I) the place where the
fiduciary transacts a major portion of its administration
of the rust is in Utah, or (II) the usual place of
business of the fiduciary is in Utah.
Estate and Gift Tax.
Asset protection trusts are often structured so that transfers to the
trust will be incomplete gifts for income tax purposes. In part this is
because if the transfer to the APT were a taxable gift, the amount
that could be sheltered in the APT would be limited to the $1 million
exemption from gift tax.
As long as the gift to the APT is incomplete, then the value of the
APT will be includible in the settlor’s taxable estate upon his death.
OFFSHORE TRUSTS
An offshore trust is a trust of which at least one trustee is a individual or
corporation who resides outside of the United States, and which is construed,
interpreted, administered and otherwise subject to the laws of a foreign country.
The most significant benefit to creating an offshore trust is its inherent creditor
protection which arises largely from its location in foreign jurisdiction. Another
significant benefit to creating an offshore trust is the ability to create a spendthrift
trust while remaining a beneficiary. Offshore trusts are frequently structured as
“self settled trusts” which allows the settlor to also be a beneficiary.
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12. Creating an offshore trust creates significant obstacles for a creditor trying
to recover assets. The following roadblocks to recovery will deter a creditor
seeking to recover from an offshore trust.
a. By requiring a creditor to proceed in a foreign jurisdiction, the
creditor will face geographical, financial, legal and procedural
hurdles.
b. The cost of pursuing a claim against a foreign trust can be high
since most foreign jurisdictions prohibit contingent fee litigation and
may require a large deposit to initiate a proceeding.
c. Additionally, offshore jurisdictions generally don’t recognize foreign
judgments which means a creditor claims will have to be litigated
from the start in the foreign jurisdiction.
Because it is jurisdictionally severed from the United States, an offshore
trust is less likely than a domestic trust to be targeted as a source for satisfying a
future judgment or claim. The difficulty in accessing the trust, both physically and
legally, will likely influence a future creditor’s decision as to whether to pursue an
action or settle in ways more favorable to the debtor. This planning is effective
because the foreign jurisdictions have laws that prevent recognition of judgments
rendered by U.S. courts.
Structure of Trust Agreement
a. The provisions of an offshore trust generally include the following:
i. The trust will be governed by the laws of the selected
foreign jurisdiction.
ii. The trust will be irrevocable.
iii. The trust beneficiaries will include the settlor and the
settlor’s family members.
iv. A trustee doing business in the foreign jurisdiction will be
named.
v. The foreign trustee usually will have complete discretion
over the distribution of income and principal.
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13. b. The following provisions are optional but may also be included in
the trust agreement:
i. Letter of wishes. The settlor may provide the trustee with
written instructions regarding investments of the trust
assets and distributions to family members. Any such
letter may provide guidance to the trustee but will not be
binding.
ii. Flight Clause. The trust may include a provision allowing
the trustee or trust protector to relocate the trust to
another jurisdiction if appropriate.
iii. Anti Duress clause. An "anti-duress" provision obligates
the foreign trustee to ignore directions from any person
who is acting under court compulsion.
Funding an Offshore APT
There are two options for moving assets into an offshore trust.
1. Removing the Assets from the U.S. The first option is to
relocate the assets to the selected foreign jurisdiction while
designating a foreign trustee who has no nexus to the U.S.
The assets will be removed from domestic judicial systems.
By taking these steps, a creditor seeking to satisfy a U.S.
judgment will be forced hire local counsel and travel to the
selected jurisdiction in an effort to enforce the claim.
2. Transfer Interests in a U.S. Entity to Offshore Trustee. The
second alternative is to have the settlor implement a foreign
trust in conjunction with a U.S. entity such as a family limited
liability company or a family limited partnership. The entity
will hold the designated assets. The settlor will then convey
all or a portion of his interest in the entity to the foreign
trustee. The disadvantage to this technique is that since the
assets will remain in the U.S., they are theoretically
susceptible to the jurisdiction of the U.S courts. However, the
law of the offshore jurisdiction will be applicable and the
offshore trustee will have the statutory authority of the
designated jurisdiction.
a. When a client chooses to import the law of the offshore
jurisdiction instead of moving the assets, it may still be
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14. possible to relocate the assets at a later time. If the
structure initially involves retaining the assets in the U.S.,
but an issue arises, the assets can then be moved
offshore and the entity can be liquidated. This method is
risky since the assets could be frozen by a domestic
court order before they can be moved and the creditor
would likely assert that the relocation of the assets is a
fraudulent transfer.
Selecting a Foreign Jurisdiction
When selecting a jurisdiction for an offshore APT, an individual should
look for a jurisdiction with an extensive statute on asset protection trusts. The
following is a list of provisions that will be beneficial:
1. a short statute of limitations for creditors seeking to reach trust
assets based on a fraudulent conveyance theory;
2. high burden of proof for claimants;
3. lengthy perpetuities period;
4. allows broad powers to be retained by trustee and trust protector;
5. local court retains jurisdiction over local trusts;
6. allows settlor to retain a beneficial interest in and degree of control
over the APT without exposing the trusts to creditors; and
7. substantial barriers to the freezing of trust assets.
Comparison of Domestic and Foreign APT
1. Statute of limitations. The statue of limitations is generally shorter with
an offshore APT.
a. The Bahamas, Nevis, and Cook Islands have two year statutes of
limitations. Belize has no statute of limitation on fraudulent claims.
Rosen and Rothschild, 810-2nd T.M., Asset Protection Planning.
b. Compare to Alaska – A creditor whose claim existed prior to the
creation of the APT may be able to reach trust assets only if he or
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15. she files a court action against the settlor within the later of 4 years
after the transfer of assets to the trust or one year after the transfer
was or could have been reasonable discovered by the creditor.
2. Risk for Settlor. Just as assets in a foreign APT may be difficult to
reach by creditors, the assets could be difficult to reach for the settlor
and the trust beneficiaries in the event of a political change or
misconduct or insolvency of the offshore trustee.
3. Tax treatment. A foreign APT is more likely than a domestic APT to be
treated as a foreign trust for U.S. income tax purposes. Foreign trusts
are subject to special U.S. reporting rules. There are substantial
penalties for noncompliance with these reporting rules. This can create
additional costs for the settlor in connection with the additional
reporting.
4. Cost. It is generally less expensive to create and administer a domestic
APT.
5. Access to local representation.
a. Conflict of Interest. Attorneys in foreign jurisdictions often represent
the banks or trust companies who act as the offshore trustee. This
representation would preclude them from representing a creditor
seeking to recover from an APT of which their client is the trustee.
b. Contingent fee agreements.
i. In U.S. jurisdictions, creditors are often able to enter into
contingent fee arrangements. This type of fee agreement
reduces the creditor’s risk if the creditor were to fail to
prevail.
ii. In foreign jurisdiction, such arrangements are often
prohibited by statute as against public policy. Asset
Protection Planning.
6. Burden of Proof. The burden of proof is generally stronger in a foreign
jurisdiction.
a. Offshore – the burden of proof in many offshore jurisdictions,
including the Cook Islands, is proof beyond a reasonable doubt.
Asset Protection Planning
15

16. b. In Delaware, a creditor must prove his claim by clear and
convincing evidence.
7. Nonrecognition of U.S. Judgments. With a domestic APT, substantial
concern exists that the provisions of the U.S. Constitution, specifically
the Full Faith and Credit Clause, the Contracts Clause and possibly the
Supremacy Clause, would allow a creditor to recover from a domestic
APT if a judgment is secured by the creditor in another domestic
jurisdiction (other than where the domestic APT was settled). These
constitutional issues do not arise in offshore jurisdictions.
a. The U.S. Constitution provides that “[F]ull Faith and Credit shall be
given in each State to the public Acts, Records, and judicial
Proceedings of every other State.”12 However, domestic APT courts
may disregard judgments entered against APT trustees by courts of
other states if the judgment did not satisfy the requirements of due
process including failure to join a trustee to an action regarding a
domestic APT or any defect in service on or jurisdiction over a
trustee. 13
b. The Supremacy Clause of the U.S. Constitution provides for the
supremacy of federal law over state law when there is a conflict
between the two laws.14 This provision could cause assets in a
domestic APT to become subject to federal bankruptcy provisions.
c. The Contracts Clause prohibits the enactment of any state law
which impairs the obligation of contracts and prohibits legislation
which precludes the enforcement of judgments against property
which remains for the beneficial use of the settlor. 15
Asset Protection Trusts are a great way to protect assets for the right
client situation. However, there are many factors to consider when deciding
whether to use a domestic or offshore APT. It is important to gain an in depth
understanding of the options prior to creating an APT.
1
Alaska Stat. § 34.40.110.
2
Del. Code Ann. tit. 12, §§ 3536(c), 3570–3576.
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17. 3
RSMo § 456.5-505.
4
Nev. Rev. Stat. §§ 166.010–166.170.
5
Okla. Stat. tit. 31, §§ 10–18.
6
R.I. Gen. Laws §§ 18-9.2-1–18-9.2-7.
7
S.D. Codified Laws §§ 55-1-36, 55-16-1–55-16-17, 55-3-47.
8
Tenn. Code Ann. §§ 35-16-101–35-16-112.
9
Utah Code Ann. § 25-6-14.
10
Wyo Stat. Ann. §§ 4-10-103, 4-10-506(b), 4-10-510–4-10-523.
11
Markmueller v. Case (In re Markmueller), 51 F.3d 775, 776 n.3 (8th Cir. 1995); In
re Enfield, 133 B.R. 515, 519 (Bankr. W.D. Mo. 1991).
12
U.S. Const. Art. IV, 1
13
Hanson v. Denckla, 357 U.S. 235, 255–56 (1958). See also Nastro v. D’Onofrio,
822 A.2d 286, 292–94 (Conn. 2003).
14
U.S. Const. Art. VI, 2
15
U.S. Const. Art. I, 10
17