Can You Create a Trust for Your Benefit and Defeat the Claims of Present or Future Creditors?

By Fredrick P. Niemann, Esq., a NJ Estate Planning Attorney

The answer to the question posted as the title to this blog is generally, no, you can’t. NJ has a strong public policy against self-settled asset protection trusts. Specifically, state law states that transfers made to trusts created by the debtor for his or her benefit are void as against existing or future creditors. For instance, in one case, a bankruptcy court considered the public policy of NJ against self-settled trusts when determining a unique legal issue. The court held that the creator of the trust could not unilaterally protect his property and remove the characterization of property as “his” simply by inserting a clause in the trust which made it subject to the laws of another state when he was the primary beneficiary of the trust. Equity law would not allow such a practice, said the court. NJ has a policy that a debtor should not be able to escape the claims of his or her creditors by utilizing a spendthrift trust. Thus, a court will disregard a settlor’s choice of NJ law when it is obviously more favorable to him, and will apply NJ law in determining a creditor’s claim, regarding the wording of the Trust.

Alternatively, a creditor can seek to have the Trust declared the alter ego of the Debtor and apply “reverse piercing” to the Trust in order to seize assets.

NJ recognizes the alter ego doctrine in the context of corporations. “Where a private person so dominates and controls a corporation such that the corporation is hisalter ego, a court is justified in piercing the veil of the corporate entity and holding that the corporation and private person as one and the same.

In the trust context, can a trust and/or a trustee be legally held to be the alter ego of an individual? This issue has been thoughtfully considered by leading trust experts and several state courts. The answer is generally yes, depending on the facts of the case.

If you have questions regarding an asset protection planning and trust, please contact Fredrick P. Niemann, Esq. toll-free at 855-376-5291 or email him atfniemann@hnlawfirm.com.