Rethinking the Law of Creditors' Rights in Trusts

Authors

Robert T. Danforth

Abstract

The United States is experiencing a quiet revolution in the law of trusts. In an effort to compete with the trust laws of offshore jurisdictions, in recent years several states have enacted legislation permitting so-called asset protection trusts, through which property owners can establish funds for their own benefit while sheltering those funds from the claims of creditors. These recent developments reverse the traditional American rule, which views such trusts as contrary to public policy and therefore ineffective as against creditors' claims. The developments have also inspired pointed academic criticism. This Article approaches the topic of creditors' rights from a new perspective, by considering those rights as they intersect with the rights and duties of trust settlors, non-settlor beneficiaries, and trustees. The article argues that the traditional American rule reflects a misunderstanding of how an asset protection trust fundamentally changes the nature of the settlor's relationship with his or her property: the settlor both gives up substantial rights in the property and creates rights in others. By permitting the settlor's creditors to reach the trust assets, the traditional rule disregards the otherwise enforceable interests of the other trust beneficiaries. The article concludes that, in this and other respects, the traditional rule is theoretically unsound and that asset protection trusts should be respected in some circumstances.

Recommended Citation

Robert T. Danforth, Rethinking the Law of Creditors' Rights in Trusts, 53 Hastings L.J. 287 (2002).
Available at: https://repository.uclawsf.edu/hastings_law_journal/vol53/iss2/1