Further, critics noted, anyone prescient enough to set up a trust and move assets into it well before getting into trouble would likely be untouched by the new rule. Schumer offered an amendment, rejected by the Senate, that would have allowed the bankruptcy court to simply void transfers of more than $125,000 to an asset protection trust if they occurred within 10 years of the debtor's bankruptcy filing.
However, George Mason University law professor Todd Zywicki said the fact that concern over these trusts has surfaced only recently, though the bill has been under consideration for eight years, suggests the trusts don't pose a crisis. "Judges have tools, such as denying discharge" of debts, for dealing with cases where they think assets are being hidden, he said.
Sens. Mitch McConnell (R-Ky.), left, Orrin G. Hatch (R-Utah) at a news conference after the Senate's bankruptcy vote.
(Melina Mara -- The Washington Post)
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Tighter at the Upper End
From
washingtonpost.com
at 12:00 AM
Three current bankruptcy benefits for the well-advised, and what would change:
Benefit: Homestead exemption.
What it does: In certain states, allows filer to shield full value of residence from creditors.
What pending bill would do: Require longer residence in state to qualify.
Benefit: Chapter 11.
What it does: Filers with debts over about $1.2 million are barred from Chapter 13. But Chapter 11, meant mainly for businesses, allows debtors to keep most post-filing income.
What pending bill would do: Allow creditors to recover post-filing income above that needed for filer's living expenses.
Benefit: Asset protection trusts.
What it does: Five states and certain foreign countries allow a person to put assets into a trust for himself, and the trust qualifies for protection from creditors.
What pending bill would do: Allow creditors to recover assets that were transferred to U.S. trusts up to 10 years earlier if fraud can be shown.
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Mandatory Counseling, A Good Idea in Theory: Michelle Singletary says the bankruptcy counseling provision in the bankruptcy bill "is there as a roadblock. It's a setup, lobbied for by banks and credit card companies, to steer people away from bankruptcy to debt repayment plans."
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_____Cash Flow_____
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Tax Liens Complicate Bankruptcy Filings: Albert B. Crenshaw reminds readers that "[b]ankruptcy laws provide filers with protection from many kinds of creditors, but tax collectors generally are not among them."
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"If it turns out to be a problem, Congress can go back and amend the law," he said.
Many states have long permitted individuals to place assets in trust for another person, typically a spouse or child, to shield those assets from that person's creditors through what has been dubbed a "spendthrift clause."
However, until 1997, states uniformly forbade "self-settled" trusts -- those in which the person providing the assets and the beneficiary are the same -- from enjoying the same kind of protection from creditors. But that year Delaware and Alaska eased that prohibition, and others have since followed suit.
Now, Delaware, Alaska and the others allow individuals to place assets in trust for themselves with extensive creditor protection as long as the trust meets various anti-fraud and procedural requirements. Generally, the person who places assets into the trust, known as the settlor, does not need to live in the state in which the trust is located, though an in-state trustee or other representative is required.
The change is just one element of wider-ranging shifts in state trust law. In recent years, a number of states have repealed laws against perpetuities, which forbade trusts that last forever. With those rules abolished or greatly eased, individuals can establish what have come to be called "dynasty trusts" for their heirs, in which assets can be held without being subject to estate taxes as generations come and go.
Dynasty trusts can also include spendthrift clauses that allow them to fend off plaintiffs, ex-spouses and other creditors for centuries.
The legal changes are fueled by states' desire to make themselves attractive to trusts, which generate fees and other income, and in many cases tax revenue.
It would be possible for Congress to craft a statute that would snuff out both domestic and foreign asset protection trusts, Harvard professor Warren said.
"No one has a right to a discharge [of debts] in bankruptcy," she said, so Congress could set conditions that would force debtors to expose trust assets to creditors, if they want the protection of the bankruptcy law.
As it is, Warren said, if self-settled trusts are unavailable, it would be a simple matter to make someone else -- a spouse, child, sibling, or other trusted relative -- the beneficiary and use an ordinary spendthrift clause.
"Only a childless, unmarried, orphaned hermit who could think of no one to make the ultimate beneficiary [of his trust] has to worry about the Talent amendment," she said.
