The Bankruptcy Court for the Western District of Washington has now joined other states in invalidating transfers to a self-settled trust on a variety of grounds in the latest asset protection self settled trust case, In re Huber, 2012 Bankr. LEXIS 2038 (May 17, 2013). The Trustee in this case successfully obtained a summary judgment invalidating Donald Huber’s transfers to the Donald Huber Family Trust made shortly before he filed bankruptcy, on the grounds that: (1) the Trust was invalid under applicable state law, (2) Huber’s transfers were fraudulent under § 548 (e)(1) of the Bankruptcy Code, and (3) Huber’s transfers were fraudulent transfers under the Washington State Fraudulent Transfers Act.
Donald Huber was a real estate developer who had been involved with real estate development in the State of Washington for over 40 years. He resided in Washington, his principal place of business was Washington, and almost all of his assets were located in Washington. In 2008, due to the economic downturn, particularly in the real estate market, Huber sought to raise additional cash for his business, but was unsuccessful in that endeavor. He fell behind in most of his loans and by mid 2008 most of his creditors were threatening foreclosure and litigation.
In August of 2008, Huber retained a Washington attorney and established the Donald Huber Family Trust dated September 23, 2008 (the “Trust”), a self-settled asset protection trust that adopted Alaska law as the governing law, with the Alaska USA Trust Company and his son as the Trustees. The Trust provided for discretionary distributions for the benefit of Donald Huber, his children, grandchildren and stepchildren. Huber transferred about 78% of his assets to the Trust. Substantial distributions were made to Huber or for his benefit from the inception of the Trust, as there was little or no evidence that the Trustees refused requests for distributions. The record before the Court indicated that Alaska USA Trust Company did little active administration of the assets in the Trust.
Huber filed bankruptcy in February of 2011. After the bankruptcy examiner filed his report, the Trustee in bankruptcy filed a motion for summary judgment to set aside the Trust and the transfers to the Trust on the grounds that the Trust was invalid and the transfers were fraudulent as a matter of law.
In addressing the validity of the Trust, the court first addressed the choice of law issue to determine what state law to apply, as Alaska by statute authorizes the creation of self settled trusts and Washington does not. The Trust had adopted Alaska law as the governing law. The Federal bankruptcy court applied federal choice of law rules. In doing so, the federal court looked to the Restatement (Second) of Conflicts of Laws, which provides that a trust is valid
if valid (a) under the local law of the state designated by the settlor . . . provided that this state has a substantial relation to the trust and that the application of its law does not violate a strong public policy of the state with which, as to the matter at issue, the trust has its most significant relationship . . .
The court then set out the factors to determine substantial or significant relationships that a trust might have with the two states as (1) the place where the trust is to be administered, (2) the place of business or domicile of the trustee at the time of the creation of the trust, (3) the location of the trust assets at the time the assets were transferred to the trust, (4) the domicile of the settlor at the time the trust was created, (5) the domicile of the beneficiaries at the time the trust was created and (6) the location of the attorney who prepared the trust and the location where it was executed. As to each of these factors, the court found that the facts were not in dispute ant that Washington was the applicable location. At the time the trust was created, Huber, one of the trustees and all the beneficiaries of the Trust resided in Washington, all the property placed in the Trust, except for one $10,000 CD, was transferred to the Trust from Washington, and much of the property placed in the Trust was Washington real property or businesses, the attorney who prepared the Trust practiced in Washington and the document was signed in Washington. “The only relation to Alaska was that it was the location in which the Trust was to be administered and the location of one of the trustees, AUSA.”
Since the court found that Washington had the most significant relationship with the Trust, and that Washington has a very strong public policy against self-settled trusts, the court disregarded Alaska law and applied Washington law to find that Huber’s transfers to the Trust were void as a matter of law.
Similarly, the court agreed with the trustee in bankruptcy that the transfers to the Trust were fraudulent under both § 548(e)(1) of the Bankruptcy Code and under the Washington Uniform Fraudulent Transfers Act. Section 548(e)(1) of the Bankruptcy Code authorizes the bankruptcy trustee to avoid as fraudulent any transfer by a debtor to a self-settled trust within 10 years of the filing of the bankruptcy, where 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.” Under the Uniform Fraudulent Transfer Act, a transfer is fraudulent if the transfer was made without consideration and the “debtor acts with actual intent to hinder, delay, or defraud a creditor.”
In examining whether Huber transferred his assets to the Trust “with actual intent to hinder, delay or defraud” a creditor, the court looked at the “badges of fraud” connected with the transfers that proved by circumstantial evidence that Huber’s transfers were fraudulent as a matter of law under both § 548(e)(1) of the Bankruptcy Code and the Uniform Fraudulent Transfer Act. The court made note of the many “badges of fraud” uncontroverted in evidence including (1) that Huber had been under threat of litigation from his creditors at the time of the transfers; (2) the transfers consisted of 78% of his property; (3) the transfers were to a self-settled trust; (4) Huber continued to benefit from the assets transferred; (5) Huber did not receive any consideration for the transfers; and (5) the Trust specifically stated that it was created for the purpose of sheltering assets from his creditors, and there was evidence that Huber had real concerns that, in light of the declining real estate market, his creditor problems would result in him losing his assets. These badges of fraud made it easy for the bankruptcy court to conclude that Huber made the transfers “with actual intent to hinder, delay or defraud” his creditors and that the transfers to the Trust were fraudulent and voidable by the bankruptcy trustee.
The Huber bankruptcy court has now joined the California Court of Appeals in Kilker v. Stillman, 2012 WL 5902348 (Cal. App. 4 Dist., Unpublished, Nov. 26, 2012, (a Nevada asset protection trust created by a California resident) and the Illinois Supreme Court in Rush University Medical Center v. Sessions, 2012 WL 4127261 (Ill., Sept. 20, 2012), (a Cook Island Trust created by an Illinois resident) that a self settled spendthrift trust is void as to the settlor’s creditors under the Uniform Fraudulent Transfer Act. In fact, the Kilker court noted that although Nevada authorized self-settled asset protection trusts by statute, it had done so without reference to or exemption from the provisions of its Uniform Fraudulent Transfer Act. For more details on these cases, see our prior discussions of Kilker and Rush University Medical Center.
As evidenced by this line of cases, it may be increasingly difficult for a non-resident of a state with a statutory self-settled spendthrift trust provision to utilize the creditor protection afforded by such statutory self-settled spendthrift trust provisions of that other state. It may be possible to take advantage of another state’s asset protection trust statute, but this may be limited to circumstances in which all of the assets are intangibles that are held in the asset protection state at the time of the transfer, and are then transferred into the possession of a sole trustee resident in the asset protection state, with active administration only in that other state. However, as long as the settlor is sued in the settlor’s domiciliary state, the courts of that state may likely find that the domiciliary state has the most significant contacts, and the domiciliary state’s public policy compelling. We have not yet seen a case in which the domiciliary state upheld the asset protection nature of the self-settled trust created under the laws of another jurisdiction. Further, in a state that has validated self-settled asset protection trusts by statute, but has also enacted the Uniform Fraudulent Transfer Act (enacted by 43 states and the District of Columbia and Virgin Islands), it is uncertain how that state’s court will evaluate the transfers to such a trust, even if by a domiciliary of that state, in light of the state’s Uniform Fraudulent Transfer Act.
If you are considering this type of planning for your own estate planning needs, you should contact your attorney to consider whether a self settled spendthrift trusts can be validly created and funded in your personal circumstances if the state whose law applies to the formation and administration of the trust has enacted the Uniform Fraudulent Transfer Act, without dealing with the inconsistency between the spendthrift protection and the Uniform Fraudulent Transfer Act.