An attorney called for help collecting a debt. The debtor had owned a piece of commercial property in a revocable living trust that had been established as part of an estate plan. The trust provided that the property would pass to the debtor’s children after her death. This attorney on behalf of her client filed a lawsuit against the debtor. The debtor subsequently amended the living trust to make the trust irrevocable, make the debtor’s children the beneficiaries, and appoint one of the children as the trustee. The attorney obtained a large money judgement against the debtor in the lawsuit. debtor died. The attorney asked if his client could collect the judgment by placing a lien on the property owned by the irrevocable trust.
The best approach would to get the court to declare the the trust amendment to be a fraudulent transfer and reverse the trust amendment making the trust irrevocable for the benefit of the children. The trust property would then revert to the debtor and the creditor can foreclose the judgment lien against the property. The debtor’s death would not protect the property.
The debtor will probably argue that a trust amendment is not a transfer of an asset so that the fraudulent transfer laws do not apply. But, the amendment of the trust seems to be designed to make the trust immune from creditors, by virtue of the spendthrift clause, and to protect from creditors a valuable real property that had been vulnerable when owned by the debtor’s revocable trust.
Some time ago I published a blog post that said that changing a revocable trust to an irrevocable trust could be a fraudulent transfer. That post is true today. The legal principal was based upon a holding in a Florida bankruptcy case. The case is still the most recent pronouncement on the issue in Florida.