Fear Not the Asset Protection Trust

Abstract

This article addresses the rise and gradual diversification of state statutes permitting settlors to self-settle trusts that avoid claims by their own creditors (known generically as asset protection trusts). The article argues that, whatever the motives underlying their authorization, asset protection trusts are unobjectionable, and even potentially beneficial, as a matter of public policy, at least to the extent that they affect the rights of voluntary (contract) creditors. The same can be said of revocable asset protection trusts, a new type of vehicle permissible since 2004 under one state statute. On the other hand, statutory provisions shielding the corpus of an asset protection trust from the claims of involuntary creditors (tort claimants, alimony creditors, etc.) raise a different set of concerns and merit revision on policy grounds. Unless efforts to revise the relevant statutes are undertaken in a broader legal context, however, so that they encompass all sorts of asset protection strategies, those efforts would prove counter-productive. A second section of the article analyses the problem of asset protection trusts in a bankruptcy proceeding. Like other forms of spendthrift trust, asset protection trusts should remain impervious to creditors' claims in bankruptcy, but as a matter of discharge policy ought to be made subject to the new means test regulating eligibility for bankruptcy relief. Ensuring that this occurs in all cases will require tweaking the language of the Bankruptcy Code as revised in 2005.