Fraudulent Conveyances Masquerading as Asset Protection Trusts

Viewed with a dispassionate but slightly skeptical eye, transfers to asset protection trusts are fraudulent conveyances pure and simple. I think so and the evidence points that way. The asset protection trust is a simulacrum of the well-known and thoroughly conventional mode of holding assets for a “beneficiary” by a “trustee” under the terms of an elaborate document. Trusts, of course, are widely used in estate planning and elsewhere in circumstances where one person, the settlor, wishes to make assets available to another on the settlor’s terms; a parent might use a trust to put aside assets for a minor child or for several grandchildren to share for their education. Typically the settlor wishes to direct or limit the beneficiary’s use of the principal and income because of the beneficiary’s tender age or because the settlor fears that the beneficiary will waste the assets or otherwise use them for a purpose contrary to the settlor’s wishes. The prototypical asset protection trust is different. In it the settlor and the beneficiary are the same person. When he is also the beneficiary, the settlor has the direct right to enjoy the assets; even when he is not the beneficiary, the settlor frequently has the indirect right to enjoy the assets by retaining the power to remove any trustee who does not honor the settlor’s requests. Invariably these trusts have “spendthrift” terms that purport to remove the trust assets from the reach of the settlor’s creditors. Seventeen states have adopted statutes that authorize asset protection trusts. All of these statutes change the law that prevailed before their enactment. Prior to the adoption of these statutes, the law in all of the states invalidated self-settled spendthrift trusts under a common law principle that found all such provisions to be a violation of public policy or because they were found to be fraudulent conveyances. As elaborated below, these statutes wipe out the contrary common law in the states where they are enacted and they modify the state fraudulent conveyance law to make a creditor’s fraudulent conveyance path more difficult