Saturday, November 5, 2011

No Protection Under Bankruptcy for Self-Settled Trust

Alaska is among a handful of states that explicitly provide creditor protection to beneficiaries of trusts that are "self-settled" meaning in this context that the same person created the trust, contributed the property to the trust, and is one of the beneficiaries of the trust. In 2005, Mr. Mortensen, an Alaska resident and at the time, solvent, created an Alaska Asset Protection Trust and contributed cash and real property to the trust. Mr. Mortensen and his heirs were beneficiaries of the trust. In 2009, Mr. Mortensen filed for bankruptcy, with more than $250,000 in debts. He did not list the trust as one of his assets in the bankruptcy estate. The Bankruptcy Trustee attacked the trust, claiming in part that because Mr. Mortensen created the trust with intent to protect the assets against his future creditors, the transfers were void under new Bankruptcy Code Section 548(e). The Section was adopted as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. The Alaskan Bankruptcy Court agreed with the Bankruptcy Trustee in Battley v. Mortensen, D. Alaska, No.A09-90036-DMD. The Court commented that Section 548(e) "closes the self-settled loophole" and made it clear that it was the intent to protect the trust assets from creditors that caused the trust to be included in the bankruptcy estate. Although this case is limited in scope to the Bankruptcy Code, we will keep watch for developments in this area. At this time, Colorado does not have explicit asset protection for assets in a self-settled trust. If you’d like to read more about the the decision in the Mortensen case, go to