Court Holds Trust Funds Not Shielded From Creditors

Mortensen, an Alaska resident, was solvent and liquid in 2005 and settled a self-settled Alaska Domestic Asset Protection trust for the benefit of himself and his heirs. He contributed a $80,000 cash gift from his mother and a $60,000 piece of property.

Mortensen filed for Chapter 7 bankruptcy in 2009 after incurring over $250,000 in credit card and other debts. He did not declare the assets in his trust as part of his bankruptcy estate. The bankruptcy trustee brought an adversary action against Mortensen, the trustees of the trust, and the protector of the trust (Mortensen’s mother) claiming, in part, that the transfers to the trust should be voided under Bankruptcy Code section 548(e) because Mortensen settled his trust with the intent to shield the trust assets from potential creditors.

The court in Battley v. Mortensen, Adv. D. Alaska, No A09-90036-DMD (2011) agreed with the bankruptcy trustee and voided the transfers. The court said:

To establish an avoidable transfer under sec. 548(e), the trustee must show that the debtor made the transfer with the actual intent to hinder, delay and defraud present or future creditors by a preponderance of the evidence. Here, the trust’s express purpose was to hinder, delay and defraud present and future creditors. However, there is additional evidence which demonstrates that Mortensen’s transfer of the property to the trust was made with the intent to hinder, delay and defraud present and future creditors.

See Jay Adkisson, Mortensen: Alaska Asset Protection Trust Funded By Solvent Settlor Completely Fails To Protect Assets In Bankruptcy Against Future Creditors, Forbes, Oct. 19, 2011.

Jim Hillhouse (WealthCounsel) for bringing this article to my attention.