Wolfson Bolton recently won a motion for summary judgment holding that a self-settled spendthrift trust was property of a debtor’s bankruptcy estate. Wolfson Bolton represented the chapter 7 trustee of a debtor who sought to exclude his beneficial interest in a trust from estate property. Under 11 U.S.C. § 541(c)(2), property of the estate does not include a beneficial interest in a trust if there is a restriction on the transfer of that interest that is enforceable under applicable nonbankruptcy law. The debtor had transferred his assets into a trust of which he and his wife were beneficiaries and trustees. The trust contained a spendthrift provision that allegedly restricted the voluntary or involuntary transfer of the debtor’s beneficial interest. The issue before the Court was whether the spendthrift provision was enforceable under applicable nonbankruptcy law. If unenforceable, the trust would be estate property.
The Court held that the spendthrift provision was unenforceable under Michigan law because the trust was "self-settled." Michigan law has long held that self-settled spendthrift trusts, or trusts in which a person places his/her own assets, names himself/herself a beneficiary, and restricts the transfer of his/her beneficial interest with a spendthrift provision, are void as against public policy. Indeed, the reason behind the public policy is reinforced by the Court’s opinion, as the Court extensively reviewed the debtor’s uncontested testimony demonstrating that the debtor regularly disregarded the formalities of the trust by treating the trust’s assets "as his own, to do with as he wishes, whenever he wishes." Accordingly, the Court held that the trust was property of the estate.
The case is Kohut v. Lois and Richard Lewiston Living Trust, dated September 10, 1986, et al. Read a copy of the opinion here.