In our collection practice we have found that many debtors try to hide their assets from creditors by putting their money into a trust. The debtors believe that as long as this money is not in their name individually, they are protected from levy by their creditors. This is absolutely incorrect. If a creditor knows what he is doing, he can just as easily attach that money as he could if the money were in the debtor’s individual name.
The first consideration for the creditor, is whether the debtor has created a “revocable inter vivos trust” or an “irrevocable inter vivos trust”.
An irrevocable inter vivos trust can be identified by a clause in the trust stating that the debtor has given up any and all rights to the monies and those monies now belong to the beneficiary of the trust. If such a trust has been created, then a creditor will not be able to reach the funds in the trust.
However irrevocable trusts are uncommon and not the ones typically created by debtors. The much more common trust created, is the revocable inter vivos trust which can be levied upon by creditors with relative ease.
The first thing a creditor must do when he discovers a trust, is to determine which type he is dealing with. A revocable inter vivos trust can be identified by a clause contained within it that states that the monies in the trust will not pass to the beneficiary of the trust until the death of the debtor. The reason why this trust is so popular and so widely used, is because it allows the debtor to retain complete control of his money while he is alive and at the same time avoid probate taxes by passing title to the beneficiary simultaneously on the debtor’s death.
Since it is highly unlikely that the creditor will have a copy of the debtor’s trust available for review, the question arises as to how a creditor can identify which type of trust his debtor has created. The easiest way to identify a type of trust, is through its name. This is because most trust names include the type of trust it is. This is done to avoid any possible confusion in classifying the type of trust created.
For example, a common trust name is “The John Smith Family Revocable Trust” or “The John Smith Family Irrevocable Trust”. If you come across a trust which has a name that does not include the type of trust it is, then the other way to determine this information is to extract this information from the debtor himself.
If you have already succeeded in obtaining a judgment against the debtor, you can serve him with a subpoena duces tecum with a judgment debtor examination to produce a copy of the trust for your inspection.
The most important thing to remember, is that as long as you provide the sheriff and the bank with evidence that the trust is revocable, they will follow your instructions to levy upon the monies and you will be successful in collection of your debt.
Another common situation arises when your debtor has not created a trust, but rather is the beneficiary of a trust. The most common situation where this arises, is where the debtor has a wealthy parent who has left him a lot of money in a trust. In this situation, the creditor may not execute on the debtor’s interest in the trust until he obtains a court order to do so from the court where the trust is being administered.
This court order should not be a problem to obtain unless the trust is set up for the debtor’s education or for his support. These types of trusts are generally very difficult to levy upon because they place so many restrictions on the debtor’s right to use the monies.
However, creditors will be able to set aside assets fraudulently transferred to a trust under the Uniform Fraudulent Transfer Act which took effect on January 1, 1987. The basic test for whether a transfer was fraudulent is “if the debtor made the transfer with actual intent to hinder, delay or defraud any creditor”.
Fraudulent intent may be inferred from certain types of debtor conduct. The following are a few examples of such conduct.
- The transfer of assets was to a relative or other insider;
- The debtor retained control or possession of the asset after the transfer;
- The transfer was concealed;
- The debtor was sued or threatened with suit before the transfer was made;
- The debtor did not receive reasonably equivalent consideration for the asset transferred;
- The debtor became insolvent shortly after the transfer was made;
- The transfer was made shortly before a substantial debt was incurred;
If any of the above described situations are present, a creditor can make a strong case for reversal of the transfer of assets back into the debtor’s name as well as punitive damages for the fraudulent behavior.
The important thing to remember, is that there are many ways to get around trusts in debt collection and all avenues should be explored. Good luck!!!