Applicability of Exemptions in Bankruptcy to Assets heldin Revocable Trusts
Posted: Tue May 17, 2011 6:44 pm
The easier terminology to apply is first and third party trusts. A first party trust is one funded with the assets of the person named as beneficiary, aka as a self settled trust. A third party trust is one that was funded with the assets of someone other than the bennie. The typical revocable living trust that is used in estate planning in CA is a self settled/first party trust as to the settlor(s) (a term of art in CA law that is synonymous with trustors) during their lifetimes and a third party trust as to their beneficiaries after they die. This is the type of trust we most typically see with our consumer clients. The problems occur when the debtors parents have inconveniently croaked before the child/beneficiary has filed their bankruptcy or within 180 days after and the trustee wants some or all of the distribution. Protecting the distributions from this type of trust in bankruptcy is a terribly complex problem for someone who does not have a solid background in trust law and practice. With the appropriate knowledge of the case law, it is an interesting and fun area for those of us who do, with all sorts of twists and turns and opportunities.
A trustees use of 548(e)(1) to go after a revocable living trust would be, as Mark pointed out, an example of a trustee being out of their depth regarding trust law (he gave two options, but I vote for the depth issue). It would also be a big waste of time. The assets are as available as an account in the debtors/settlors own name for the reasons that Mark pointed out, so why go to trouble of using 548. The problem with the proper use of 548 is that it has a major flaw in it. It is designed as a sort of extension of the fraudulent transfer rules in that it gives the trustee 10 years to get the transfer back instead of 2, 4 or 7, but it allows a settlor to transfer assets to an irrevocable self settled trust for the benefit of someone other than the settlor. 548(e)(1)(C). An exception one could drive a Mac truck through, as the saying goes. Why the drafters put that it there, I cannot imagine, but being out of their depth is probably the answer.
If you have any questions or concerns please contact me.
Pat
Patrick T. Green
Attorney at Law
1010 E. Union St. Suite 206
Pasadena, CA 91106
Tel: 626-44-8433
Fax: 626-449-0565
Email: pat@fitzgreenlaw.com
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