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Asset Protection Trusts After Mortensen

The federal bankruptcy Court recently came out with a big ruling in the asset protection world. It’s called the “Mortensen case” or more officially known as:

Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011 (Original Memorandum) and July 18, 2011 (Memorandum Denying Motion For Reconsideration).

In this case Mr. Mortensen set up an Alaskan asset protection trust in 2005.  He filed bankruptcy in 2009.  The trust was designed to protect his assets from creditors including bankruptcy. However, one has to remember there is a connection between the Federal bankruptcy laws and the state trust laws.  That is, you need to keep the Federal laws in mind when implimenting a state asset protection trust. In particular, Mr. Mortensen filed his bankruptcy without the aid of an attorney. This was likely his fatal flaw. This is because there is a well known federal bankruptcy law which is called a “clawback” and allows the bankruptcy trustee to claw back assets that were given away (including to a creditor protection trust) within 10 years. If Mr. Mortensen had hired an attorney they probably would have told him to wait a few years before filing for bankruptcy. If he had done that his asset protection trust would have protected him as he desired.

The key point is that YES domestic asset protections trusts are still a great tool for some clients to use.  However, this is for experienced estate planning lawyers to set up.  There are several states that have domestic asset protection trusts though California is not one of them. However, California residents can get protection from other state’s laws if they set their affairs up properly.

If you want to talk about domestic asset protection contact an experienced California estate planning lawyer like John Palley!  -John

P.S. The federal bankruptcy law referred to above, 11 U.S.C. section 548(e) provides in part:

(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if–

(A) such transfer was made to a self-settled trust or similar device;

(B) such transfer was by the debtor;

(C) the debtor is a beneficiary of such trust or similar device; and

(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.