Chapter 29 - § 29.7 • SELF-SETTLED SPENDTHRIFT TRUSTS
| Jurisdiction | Colorado |
§ 29.7.1—Introduction
When one establishes a spendthrift trust for himself or herself and possibly others, the trust is a "self-settled spendthrift trust." The weight of authority is that self-settled spendthrift trusts are indeed valid trusts; however, depending on the applicable law, they may or may not afford protection against the settlor's creditors.
Importantly, this is the case not only with respect to the settlor's present or subsequent creditors, but also as to future potential creditors, and for as long as the trust may be in existence. Trust assets would continue to be available to satisfy judgments against the settlor on the basis that the "door to trust assets" remains open as a self-settled spendthrift trust; a judgment creditor would not need to resort to a fraudulent transfer theory or other claim to access trust assets.
Approximately 25 offshore jurisdictions and 20 domestic states (depending on how one categorizes) statutorily recognize the validity of the self-settled spendthrift trust. This legislation commenced offshore in December 1989, when the Parliament of the Cook Islands enacted the International Trust Amendment Act of 1989, amending the Cook Islands International Trust Act of 1984. Onshore versions of this legislation commenced in 1997, when the legislature of Alaska enacted Alaska Statute § 34.40.110, entitled "Restricting transfers of trust interests." (See §§ 29.8.3 and 29.8.4 for a more detailed discussion on these statutes.)
§ 29.7.2—Self-Settled Spendthrift Trusts in Colorado
Are self-settled spendthrift trusts useful for asset protection in Colorado? It depends upon what court one asks and what facts exist. C.R.S. § 38-10-111 is entitled "Trusts for use of grantor void against creditors." This statute dates back to the mid-1800s, and it states:
All deeds of gift, all conveyances, and all transfers or assignments, verbal or written, of goods, chattels, or things in action, or real property, made in trust for the use of the person making the same shall be void against the creditors existing of such person.
What is an "existing" creditor? This phrase is interpreted in Fulton Investment Co. v. Smith, 149 p. 444 (Colo. App. 1915), aff'd, 64 Colo. 33 (Colo. 1917), wherein the Colorado Court of Appeals found that as the plaintiff's tort claim arose after a transfer to a corporation, the tort claimant must prove that the transfer was made fraudulently (as used in the Colorado fraudulent conveyance statute). Incorporating that definition, this statute should have no application to creditors who come into existence after a transfer.
The focus now turns to the phrase "for the use of." In Campbell v. Colorado Coal & Iron Co., 10 P. 248 (Colo. 1885), the Colorado Supreme Court judicially interpreted "for the use of" and concluded that the statute does not apply unless the trust's principal purpose is for the use of the grantor. An incidental benefit does not invoke the statute.
The Colorado self-settled trust statute was further interpreted in In re Baum, 22 F.3d 1014 (10th Cir. 1994). Baum centered on two irrevocable trusts settled in 1983 for the benefit of the settlor's children. The settlor also reserved various benefits under the trusts and various controls over the trusts. In fact, the "debtor performed many of the duties of the trustee . . . ." Id. at 1019.
The settlor "transferred into the trusts his residence, some furniture and fixtures, and a collection of antique clocks." Id. at 1015-16. The settlor reserved the right to live in the residence so long as the settlor "timely services all encumbrances against such residence, and pays all taxes, insurance and utilities on such residence or associated with its occupancy by the Settlor." Id. at 1016. The settlor also reserved the right to require the trustee to sell the residence and purchase another home as substitute trust property. The settlor retained the authority to veto the sale of the home and to request replacement of that home with one of his choosing. When the trusts were settled, the settlor had a net worth of more than $1 million, and had total debts of less than $115,000.
Approximately six years later, the settlor filed bankruptcy. The appointed bankruptcy trustee subsequently filed an action to recover trust property for the bankruptcy estate asserting (1) the creation of the trusts constituted transfers for the benefit of the debtor and were thus void as a matter of Colorado law, and (2) the debtor used trust property as his own, thus effecting a merger of legal and equitable interests in the property. The bankruptcy court referred the case to the federal district court, which upheld the validity of the trusts. The bankruptcy trustee appealed.
The Tenth Circuit first noted that the bankruptcy trustee's arguments could be categorized that either (1) "[t]he trusts were void at inception, or at least voidable if necessary for the benefit of creditors, regardless of how they may have been operated," or (2) that the trusts were "shams because of the way they were operated." Id. at 1017.
In first addressing the void or voidable argument, the court noted that as a matter of local statutory law, a trust for the use of the person making the same shall be void only as to the creditors existing of such person. As the creditors in bankruptcy were not in existence as of the date of the settlement, this statute was inapplicable.
As to the second argument advanced by the bankruptcy trustee, the court noted that while there were apparently no decisions specifically dealing with creation of a sham trust by a debtor, persuasive authority existed "in other contexts, particularly corporate and tax cases, that when a person in a position analogous to debtor here retains too much control over transferred property, ignores legal formalities, and uses the property as his own, the property is treated as owned by the transferor rather than the entity that is the nominal owner." Id. at 1018. The court concluded that these cases were "all distinguishable from the instant case." Id.
The court disposed of the bankruptcy trustee's claim that the trustee himself failed to properly administer the trusts, particularly noting the settlor's control over the trusts, by noting that "even if debtor acted as trustee, it does not follow that the trust is a sham." Id. The court noted: (1) the essence of a valid trust is separation of the legal and equitable interests in property, with legal title held by the trustee, and the beneficial interest vested in the beneficiaries; (2) there was no evidence of self-dealing between the trust and the settlor, although the settlor may have exercised control over the subject assets and the general administration of the trust; (3) the settlor may have, in fact, "performed many of the duties of the trustee"; and (4) the trusts were, in fact, administered for the benefit of the Baum children (notwithstanding the continued occupancy of the residential real property by the settlor and his spouse). The court upheld the decision of the federal district court, finding in favor of the validity of the two trusts, and ruled against the bankruptcy trustee.
The issue was raised regarding whether a self-settled spendthrift trust was invalid due to the self-settled nature...
To continue reading
Request your trial