Do-it-yourself trust planning seldom works because laymen do not understand the subtle aspects of asset protection law. Here is one example of a debtor who thought he could figure it out himself.
Our debtor was an engineer who designed residential construction. Fearing litigation, the debtor drafted a domestic asset protection trust for the benefit of his brother. The debtor named himself as “managing director” so that he retained control of all the assets he transferred into his trust.
Four years after the trust was created a homeowner sued the engineer. The engineer settled for an amount owed, but he never paid the plaintiff. The plaintiff homeowner filed a fraudulent transfer action to penetrate the domestic trust. The engineer testified at the hearing that he set up the trust for asset protection purposes. Clearly, the engineer did not anticipate a lawsuit from this particular plaintiff whom he met years after he created the trust.
The court ruled in favor of the plaintiff’s fraudulent transfer claim. The court held that the domestic trust was the debtor’s alter ego because he retained control of all trust assets. Secondly, the court said that fraudulent transfer statutes prohibit transfers intended to hinder or delay future, unknown creditors. This debtor’s problem was his testimony that he created the trust to defeat future unknown creditors.
There are a few lessons here. If you are going to use a domestic trust for asset protection you should not retain a controlling position in your trust. If you intend to give your assets away to a trust, or anyone else, it has to be a complete and total gift. Next, make your asset protection plan appear that it has some purpose other than, or in addition to, asset protection. Don’t testify under oath that the only reason you did what you did is to defeat your future creditors. And, don’t try to do this stuff yourself- its harder than it looks.