Minimize Creditor Challenges to Self-Settled Spendthrift Trusts

• Published in: Trusts & Estates 2018-11, p.14
• Main Authors: Rothschild, Gideon, Rubin, Daniel S
• Format: Article
• Language: English
• Subjects: Bankruptcy; Creditors; Disclaimers; Estate taxes; Federal court decisions; Fraud; Gift taxes; Jurisdiction; State court decisions; Trusts
• ISSN: 0041-3682

9 The question raised in Lawrence and Affordable Media LLC as to whether the debtor would really have relinquished control over such a substantial transfer of assets is relevant to the fraudulent transfer question because Section 4(b)(2) of the UVTA provides that whether “…the debtor retained possession or control of the property transferred after the transfer” is a further badge of fraud for consideration by the trier of fact in determining whether a fraudulent transfer exists. [...]the questions of the quantum of the transfer and the likelihood that the transferor has given up control over the assets are interrelated. [...]a self-settled spendthrift trust that's created for a primary purpose of estate tax savings, with the asset protection benefit being merely incidental, creates a situation in which the settlor need never suffer buyer's remorse, as silly as that might sound, should an incidental creditor concern fail to actually materialize as a real financial problem. 24 The important distinction highlighted here is that Alaska law requires, for a fraudulent transfer to be found, that the debtor's intent be specifically directed against the creditor who's brought the action (that is, “… the settlor's transfer of property in trust was made with the intent to defraud that creditor…”), whereas under the UVTA, a fraudulent transfer is found if the debtor's intent was directed against any creditor (that is, “…the debtor made the transfer or incurred the obligation… to hinder, delay, or defraud any creditor of the debtor”). [...]to ensure the greatest possible asset protection, it may be important to limit the jurisdictions that might have personal jurisdiction over the self-settled spendthrift trust to those that permit the creation of such trusts under local law. Note, however, that in Private Letter Ruling 9837007 (1998) the Internal Revenue Service refused to rule on the issue of estate tax exclusion stating, in essence, that excludability from the settlor's estate of the assets in an Alaska self-settled spendthrift trust is dependent on the facts and circumstances existing at the settlor's death, and in PLR 200944002 (July 15, 2009), the IRS again refused to rule on the issue, stating that evidence of an understanding or pre-existing arrangement between the settlor and the trustee regarding the exercise of the trustee's discretion could cause inclusion of the trust's assets in the settlor's gross estate for federal estate tax purposes under IRC Section