In 2005, the U.S. Bankruptcy Code underwent major revisions. With the changes in the Bankruptcy Law, there was some concern that the new Bankruptcy Law might negatively affect some of the protection that otherwise might be afforded through a Nevada Spendthrift Trust (aka: Nevada Asset Protection Trust).
The 2005 Bankruptcy code specifically addresses “self-settled trusts” (the Nevada Spendthrift Trust or “Nevada Asset Protection Trust” is such a self-settled spendthrift trust within the meaning of the new bankruptcy law). The new Bankruptcty law with regard to self-settled spendthrift trusts (Nevada Spendthrift Trust or Nevada Asset Protection Trust) has to do with the “transfer” of property prior to filing a bankruptcy petition. Specifically, under the new bankruptcy code provision [11 U.S.C. 548(e)], the bankruptcy trustee has the power to “avoid” (aka: undo or nullify) a transfer of assets to a self-settled spendthrift trust (such as the Nevada Asset Protection Trust or Nevada Spendthrift Trust) that is made within 10 years prior to the date of filing of the bankruptcy petition if:
(a) the transfer was made to a self-settled trust or similar device;
(b) the transfer was made by the debtor (the debtor is term for the person filing bankruptcy);
(c) the debtor is a beneficiary of the trust; and
(d) the debtor made the transfer “with actual intend to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date of such transfer was made, indebted.”
So, in other words, this new provision in the bankruptcy code is basically a “fraudulent transfer” issue with an extended lifetime of 10 years. Hence, the “intent to defraud” would be the key issue if a bankruptcy trustee attempted to utilize this provision. If there were no existing creditor issues at the time of the transfer of the assets to the Nevada Asset Protection Trust, proving the intent to defraud would likely be very difficult, at best, for the bankruptcy trustee to do. (Bear in mind also that the bankruptcy trustee’s “avoidance powers” would still allow the bankruptcy trustee to “avoid” any transfers made within the statutory time limits to force the transferred asset(s) back into the bankruptcy estate).
Also, the issue in the bankruptcy proceeding, based on this code provision, would be the asset(s) “transferred” to the Trust and not an invalidation of the Trust itself. Other trust assets that are in the trust (such as assets received for another source, pre-existing assets in the trust, etc.) would not be the subject of the bankruptcy “transfer” issue. Property funded to the trust other than from the debtor would, under the plain terms of this law, not be subject to a bankruptcy trustee’s control or ability to reach such assets (as long as the property that is funded from the other source did not originate with the debtor).