Utah Supreme Court Rejects Attempt to Specify Nevada Law as Controlling “Irrevocable” Trust

In Dahl v. Dahl, the Utah Supreme Court was asked to examine the effect of a choice-of-law clause in a trust that purported to be “irrevocable.” The clause 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.”

The first sentence of the provision was significant, because the trust granted husband-settlor continuing rights of control, even as he argued the “irrevocable” label was valid, prohibiting wife from claiming any marital interest in assets used to fund the trust.

On the choice-of-law issue, the Utah Supreme Court ruled (minus the citations and quotations from authority):

“The central dispute between the parties in this case concerns the revocability of the Trust. This is an issue of trust construction to which we would ordinarily apply Nevada law [under the choice-of-law clause]. But we cannot apply Nevada law without violating Utah public policy.

 

Utah has a long-established policy in favor of the equitable distribution of marital assets in divorce cases. . . . [B]y legislative enactment and our long-standing precedent, 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.

 

[Husband] admits that at least some of the Trust assets originated as marital property. For example, [wife] conveyed her interest in the couple’s marital home to the Trust via a warranty deed. In addition, [wife] claims to have conveyed to the Trust her interest in . . . other marital property with a value of at least $2 million. . . . Because Utah has a strong policy of equitable distribution of marital assets, we decline to enforce the Trust’s choice-of-law provision on the grounds that doing so would deny the district court the ability to achieve an equitable division of the marital estate. We therefore construe the Trust according to Utah law.”

The Court summarized the outcome on the choice-of-law issue: “As to the Trust, we hold that Utah law applies, that the Trust is revocable as a matter of law, and that Ms. Dahl is entitled to withdraw her share of the marital property she contributed to the Trust as a settlor.”

It is apparent from reading the Court’s January 31, 2015 decision in Dahl v. Dahl, that the parties were engaged in what was described as a “fiercely disputed” divorce and custody battle.  

Specification of non-forum law when there were no apparent contacts between the parties and Nevada, is arguably an aggressive effort to enhance a self-settled “asset protection” trust. Will this decision put a dent in attempts to market Nevada law as a trust haven? (Remember when Nevada used to hold a unique place as divorce law “heaven?”)  Whether the Court’s rejection of a trust’s choice-of-law clause on “public policy” grounds has resonance outside of the context of domestic relation disputes will be interesting to follow. 

The case, both the lower court ruling and the Supreme Court’s ruling, is generating a bit of buzz.  See e.g., the discussion on this estate planning blog.