Asset Protection Using Reciprocal Irrevocable Trusts

One of my new clients told me about an asset protection tool he implemented upon the advice of another attorney. The attorney had told him the protection was “ironclad.” I disagree. The client and his girlfriend each established an irrevocable trust for the benefit of one another. The trusts were identical, and each person funded the trust with the same amount of money. The trust documents had spendthrift provisions which prohibit a creditor from levying upon the interest of the respective beneficiaries. Each person served as trustee of their own trust and had the discretion, but not the requirement, to make distributions of income or principal.

I think a court would find that the debtor’s transfer of money into a trust for the benefit of his girlfriend is a fraudulent conveyance where the girlfriend had made a reciprocal transfer into trust. The debtor’s “gift” to the girlfriend was conditioned upon her reciprocal gift. In effect, the debtor received access through his girlfriends trust to the same amount of money he conveyed out of his name. There is no actual, irrevocable gift where the gift is conditioned or matched by a gift back. I don’t know of any court decision on this fact pattern. I think a court would rule that the debtor’s conveyance was to what is in effect a self-settled trust.