The Trust beneficiaries were the debtor and his three children. The trustees were the debtor’s brother and a personal friend. The trust protector was the debtor’s mother.
As contemplated in the trust documents, the real property was “considered by the Grantor and the Grantor’s children to be a special family place that should not be sold and should remain in the family.” To facilitate this purpose, the trustees of the trust were requested, but not directed, to maintain and improve the real property “in the trust for the benefit, use and enjoyment of the Grantor’s descendants and beneficiaries.” [AGAIN, JUDGE LOOKS AT PURPOSE OF TRUST BUT SEEMS TO IGNORE THIS PORTION].

In exchange for transferring the real property to the Trust, the debtor’s mother transferred $100,000 to him as part of the deal for creating the trust and transferring the real property to it to be preserved for her grandchildren.

The debtor filed his chapter 7 on August 18, 2009, 4 years after the creation of the Trust.
The court first looked to see if the debtor established a valid asset protection trust. The main issue was whether the debtor was insolvent at the time the trust was created. A requirement for the particular trust was that the Settlor be solvent. The court found that the debtor was solvent at the time by simply determining whether the debtor’s assets exceeded his liabilities.

The trustee attempted to avoid the transfer under 11 U.S.C 548(e), which provides a ten year look back period for setting aside a fraudulent transfer. This particular section was added to the bankruptcy code in 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act. The purpose of this provision was to close the self-settled trusts loophole and was primarily directed at five states that permitted such trusts, including Alaska.

The trustee had to argue 548(e) since 548(a) only allows a two year look back period. Section 548(e) states that a transfer my avoided if:
(A) transfer to self-settled trust or similar device;
(B) such transfer was by the debtor;
(C) the debtor is a beneficiary of such trust or similar device; AND
(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

The only issue before the Court was whether there was an actual intent to defraud. Unfortunately, the court found that there was. The Court’s primary reason was based on the stated purpose of the trust which was “to maximize the protection of the trust estate or estates from creditors’ claims of the Grantor or any beneficiary and to minimize all wealth transfer taxes.” The State of Alaska even stated that a settlor’s expressed intention to protect trust assets from a beneficiary’s potential future creditors is NOT evidence of intent to defraud. However, the court held that Congress had codified a federal interest which requires a different result. The Court looked at Congresses intent of 548(e) which was a reaction to state legislation (five states) overturning the common law rule that self-settled spendthrift trusts may be reached by creditors. The Court therefore reasoned that it could not apply state law to interpret the meaning of a federal statute whose purpose was to respond to that state law.

The Court attempts to cite other factors showing actual intent but the outcome hinges on the express purpose of the trust. Therefore, in what I find an extremely unfair result, the Court allowed the Trustee to set aside the trust transfer, thereby making the real property non-exempt property.

The Court completely ignored the other evidence before it, which included the purpose of transferring the property to the trust (save for the grandchildren), and the funds that were transferred to the debtor by his mother which were transferred as a result of the debtor transferring the property to the trust for his children.

In this case, the debtor did what he thought was right. He followed Alaska state law, but it ended up the worst decision he made. Had he simply kept the property in his name he likely could have claimed it as his homestead, which would have been exempt from his creditors and the Trustee.

With asset protection, sometimes people try to overcomplicate matters when usually the best solution is the most simple.