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Mortensen Case Holds that Self-Settled Trusts Don’t Work in Bankruptcy (but Our Trust Will)

A self-settled trust is a trust in which the grantor is also included as a beneficiary.  Historically, all fifty states did not allow asset protection for a self-settled trust.
  In recent years, several states have passed laws allowing asset protection for a self-settled trust.  These states include Alaska, Nevada, Delaware, Tennessee, Utah, Hawaii, Missouri, New Hampshire, Oklahoma, Rhode Island, Wyoming and South Dakota.  Many have promoted self-settled trusts under the name of a “Domestic Asset Protection Trust,”an “Alaska Asset Protection Trust,” a “Nevada Asset Protection Trust,” etc.  As more and more cases show that offshore trusts can be attacked through the use of a contempt order, these “Domestic Asset Protection Trusts have become quite popular.However, a recent bankrupcty case (Battley v. Mortensen, Adv. D. Alaska, No. A09-90036-DMD, May 26, 2011) shows that self-settled asset protection trusts are ineffective at protecting assets from bankruptcy.  This is not a situation where bad facts make bad law.  This is a case where the debtor settled the trust when he was not insolvent, and it was done four years before the debtor filed for bankruptcy.The reason the self-settled asset protection trust failed is because of a new bankruptcy law (Section 548(e)(1)) which specifically applies to a self-settled trust.  This law allows the bankruptcy court to avoid any transfer made to a self-settled trust within ten years of the bankruptcy filing if the debtor made the transfer with actual intent to hinder, delay, or defraud any entity to which the debtor became indebted whether the debt occured before or after the transfer.It is important to note that the Mortensen case and Section 548(e)(1) have no affect on any trust in which the debtor is not a beneficiary; they only apply to self-settled trusts.  Thus, our trust continues to be the best asset protection trust available in or out of the US because it is supported by the federal bankruptcy code (See Section 541(b)(1)), the Uniform Trust Code (See Section 505), the Restatements of the Law (See RESTATEMENT (SECOND) OF TRUSTS Section 156(2)), and many statutes and court cases throughout the country.Click HERE to read the case.