The Demise of Asset Protection Trusts: An Update

Last month, a Bankruptcy Court in Alaska entered a ruling against one Tom Mortensen that seemingly eviscerates asset protection trusts.

The Trust Advisor Blog has provided a comprehensive update on the fallout from that ruling:

Alaska is one of 13 states that allow assets to be placed in self-settled spendthrift trusts, in which the former owner gives up legal ownership of the property while retaining full access to it.

Under Alaska rules, Mortensen’s trust was well “seasoned” once the state’s four-year statute of limitations was satisfied in early 2009.

“That’s still the case,” says Doug Blattmachr, founder of Alaska Trust — which had nothing to do with the Mortensen trust. “As long as that statute runs out, you’re in pretty good shape.”

However, when Mortensen filed for bankruptcy shortly thereafter, he exposed his trust to the 2005 revisions to the bankruptcy code, which extended the statute of limitations to a full decade in cases where the transfer seems motivated by an attempt to evade looming debts.

Mortensen failed that test and automatically earned what Blattmachr calls a “badge of fraud” by arguing in court that the trust was designed to defeat his creditors — the equivalent of an undocumented foreign national telling the border guards he’s hoping to work under the table.

As a result, the judge naturally thought his trust looked suspicious and applied the 10-year rule, so the credit card companies have a claim on the property.

But it’s not the end of the asset protection world, lawyers with their eye on the ball tell me.

“If there was ever an illustration of how extreme facts contradict the law, this might be it,” says Wisconsin estate planner Bob Keebler.

“The sky is not falling on domestic asset protection trusts,” he says. “This is really not a surprise to anyone.”

See the remainder of the article by Scott Martin at the Trust Advisor Blog.

From the perspective of the bankruptcy court, a critical determination is the intent in transferring assets to the trust, that is whether the intent was to defraud creditors.

For the record, California, where I practice, is not one of the 13 states that allow assets to be placed in self-settled spend thrift trusts.

From Tom Mortensen we can learn the importance of good legal advice when confronting unusual circumstances.