The general fraudulent conveyance look-back period has been extended from one year to two years from the date a bankruptcy case is filed. A new ten (10) year look-back rule, however, applies to “a self-settled trust or similar devise”:
“In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if-(A) such transfer was made to a self-settled trust or similar device; (B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; and (D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.”
New Bankruptcy Act 11 U.S.C. § 548(e)(1).
Literally, this new look-back provision applies where it can be established by the bankruptcy trustee that the transfer was made with the actual intent to avoid a specific debt. One can easily imagine, however, courts assuming that such an intent exists especially if the transfer is to an asset protection trust under U.S. or foreign law. This puts a premium on documenting the non-fraudulent reasons for the establishment of the trust and the importance of never funding an asset protection trust without first documenting that sufficient assets are “left on the table” to satisfy existing creditors.
“A self-settled trust or similar device,” of course, is broader than an asset protection trust. The exact parameters will evolve as cases are decided. Presumably, it would include grantor retained annuity trust (GRATs); grantor retained income trusts (GRITs); qualified personal residence trusts (QPRTs); and other common arrangements. With these arrangements, a non-fraudulent purpose may be easier to document. If, however, such interests are exposed to the ten (10) year look-back, what is the extent of the exposure – the grantor’s retained interest, or the whole asset or fund? These arrangements are, after all, supposedly irrevocable. Should a charitable remainder trust be entirely set aside or only the grantor’s retained interest? How would a QPRT be treated – differently from a CRT? Does the QPRT qualify for a homestead exemption in jurisdictions recognizing such exemptions?