In G-d, we trust and thank G-d for trusts to keep the creditors away from our assets.

My good friend and colleague, Howard Young works for the dark side. He is an asset protection planning attorney. Recently, he spoke at the Institute of Continuing Legal Education Seminar on Debt Collection. He said that he represents wealthy individuals and that if he does his job right, we will collect nothing from his clients. He then gave us ideas and examples of how he advises his clients to protect their assets.
I walked away from that seminar with two concepts that I want to share with you:
1. Discretionary Spendthrift Trusts – This is a trust where someone puts money into a trust for a debtor.
As you may already know, a trust has three parties. The first is a settlor/grantor who gives money or property to someone called a trustee. The second party is the trustee who takes legal title to the property and manages it pursuant to a contract between the settlor/grantor and the trustee. The third party is the beneficiary.
Anyways, these trusts are written to contain language that specifically states that no creditor has a right to reach its assets. These trusts are enforceable and perfectly legal. They are also written to direct the trustee to use his or her discretion to pay bills and debts of the beneficiary. This trust can rent an apartment, own a home and obtain credit cards that it can allow the debtor to use. This is perfectly legal.
A Discretionary Spendthrift trust is used to manage money coming to a debtor from someone else. Examples of such funds are inheritances and gifts. Hence, the trustee has the right to select which debts of the beneficiary he will pay.
Note that the money that is used to settle this trust cannot come from the debtor at a time when the debtor has already incurred a large debt that would otherwise make him insolvent. This is the kind of trust that can be used with the debtor’s money only before he incurs such a debt. After he incurs a large judgment, any such transfer of his funds may be viewed as a fraudulent transfer.
2.. Domestic Asset Protection Trust. This is a cool kind of a trust. The language in these trusts sometimes contain a provision that prohibits a distribution made under duress. In one case, a debtor was ordered by a court to direct the trust company to release funds to him to pay a judgment. The debtor said that he could not do so due to the terms of the trust and the local laws of the jurisdiction under which the trust was governed. He was held in contempt and sent to jail for a lengthy time. He appealed stating that it was impossible for him to perform the order issued by the trial court since the express language of the trust prohibited distributions directed by court order. Talk about being between a rock and a hard place.
Alaska was the first U.S. state to adopt laws that allow for trusts similar to those in the Caribbean. It’s a “self-settled” trust where a debtor can set up a trust for himself and make himself the beneficiary. There are now about 12 states that allow this including Delaware. Currently, Michigan is not one such jurisdiction that allows such a self settled trust. But that does not mean that a Michigan debtor cannot set up such a trust under the laws of one of the twelve states that allow such a trust.
However, in order for such a trust to put assets outside of a creditors reach, this sort of trust must be set up before a debtor gets into trouble.Otherwise, any assets transferred to this would be nothing other than a fraudulent transfer.
You can put in all kinds of assets into a trust such as passive assets and even active assets such as a business. This is very helpful because you can still run your business as you wish even though the legal owner of the business is the trust.
There is still a trustee. You are allowed to name your own trust distribution advisor. You name you family member or a good friend. This person tells the trustee when to make distributions to you. You can even veto any distribution made to you. You have to have a qualified trustee in the state in which the trust is settled.
These trusts represent an amazing set of powers that are retained by the debtor while putting the asset beyond the reach of the creditors. Care must be exercised not only in the drafting of these trust documents, but also with their funding. A trust does not do much for someone unless assets are legally transferred to it at a time when the beneficiary is insolvent.
us. In fact, it will only make even incur larger attorneys’ fees.

My advise to my fellow collection attorneys
. When taking a creditor’s examination, always ask if the debtor is the beneficiary of a trust of any kind. Also ask the debtor if he owns any assets that were transferred into a trust in the previous five years. If the answer is “yes”, get a copy of the trust agreement and review to see if the trust is well written or if its weak. If the latter, then attack the trust as a fraudulent transfer or as an alter ego of the beneficiary. I would also subpoena the trustee to find out what role she has in the trust and whether she has any assets in her care and custody that can be attacked.

This entry was posted on Wednesday, August 6th, 2008 and is filed under Bad Debt Collection info floating around the 'Net, Debt Collection Tricks and Traps . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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