Posts tagged with "debtor"

State Employee Retirement Benefits Payments are Not Exempt from Garnishment by Victims of Violent Crime

Klingman v. Winters, KNLCV020560881, 2010 WL 5493498 (Conn. Super. Ct. Dec. 8, 2010)
Wage Execution

In a case before the Superior Court of Connecticut, a victim of a violent crime sought to have a wage execution enforced against the retirement payments of her convicted assailant in order to collect the awarded judgment. The court found that the claim for a wage execution was valid and enforceable.

The plaintiff was awarded a $240,000 judgment for injuries she sustained from a physical attack by the defendant.  The judgment was entered on a four-count complaint claiming negligence, reckless and wanton assault, intentional assault and violation of the Violence Against Women Act of 1995, 42 U.S.C. § 13981, based upon the applicable Connecticut General Statutes.

The defendant declared bankruptcy; however, the bankruptcy court found that the plaintiff’s judgment was not subject to bankruptcy exemptions.  In its memorandum of decision, the bankruptcy court characterized the attack as “vicious and brutal” and the injuries inflicted as “willful and malicious.”

A wage execution was entered against the defendant and the defendant’s employer, the State of Connecticut, and was paid to the plaintiff until the defendant retired.  The plaintiff applied for a new wage execution, which was served on the State and returned by reason of the defendant’s retirement.

The State contended that it discontinued payments on the wage execution because the defendant was placed on hazardous duty disability retirement and  the execution was impermissible according to Connecticut law prohibiting assignments of state employees’ retirement benefits, Conn. Gen. Stat. § 5-171.

Retirement Benefits Payments 

Under Connecticut law, retirement benefits of state employees are intended to support the member or beneficiary who is entitled to those payments; therefore, any assignment of such benefits is “null and void.”  Conn. Gen. Stat. § 5-171.  These benefits are “exempt from the claims of creditors.” However, if these general provisions are contrary to the law governing a particular circumstance, the law dictates “any payment shall be exempt to the maximum extent permitted by law.” Id. 

Connecticut law governing the general availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a, exempts “any pension plan, annuity or insurance contract or similar arrangement … established by federal or state statute for federal, state or municipal employees for the primary purpose of providing benefits upon retirement by reason of age, health or length of service” from the claims of all creditors of the plan beneficiary. Conn. Gen. Stat. § 52-321a(a)(5).

However, this law also provides a specific exception for victims of violent crime: “Nothing in this section … shall impair the rights of a victim of crime … to recover damages awarded by a court of competent jurisdiction from any federal, state or municipal pension, annuity or insurance contract or similar arrangement … when such damages are the result of a crime committed by [the] participant or beneficiary.” Conn. Gen. Stat. § 52-321a(b).

The plaintiff argued that the defendant’s retirement payments should be garnished pursuant to the Connecticut law governing the availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a.  She asserted that this law governed her particular circumstance as a victim of violent crime, and established an exception to the exemption of state employee retirement benefits stated in Section 5-171.

The Court’s Decision

The plaintiff’s argument raises an issue of first impression in Connecticut.  Connecticut appellate courts have not addressed the specific issue of a victim’s right to enforce a withholding order pursuant to law governing the availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a.  Discussion of the general applicability of this law has been limited to trial court decisions regarding alimony and child support obligations.

These cases have consistently found that pension benefits covered by Section 52-321a are not exempt from income withholding orders. See, e.g., Sinicropi v. Sinicropi, 23 Conn. L. Rptr. 49 (Conn. Super. Ct. 1998);  Foley v. Foley, 20 Conn. L. Rptr. 644 (Conn. Super. Ct. 1997).

The court found that the plaintiff was a victim of a crime; therefore, her claim for a wage execution upon the retirement benefits of the defendant fell within the statutory exception of Section 52-321a(b) and constituted a particular circumstance that fell within the statutory exception of Section 5-171.   The court ordered that a wage execution may be issued against the retirement benefits payments to the defendant by the State of Connecticut.

Several Different Legal Theories May Allow Creditors To Reach a Debtor’s Assets Held in Trust

In a recent case before the United States District Court for the Eastern District of New York, the United States government sought to collect delinquent taxes by accessing assets held in a trust established for the benefit of the taxpayer’s children. The current case was remanded to the District Court by the United States Court of Appeals for the Second Circuit after the Second Circuit reversed an earlier District Court ruling on the same matter. On remand, the District Court ruled that the government may collect against all assets held by the trust.

Between 1978 and 1982, the taxpayer invested in a series of tax shelters that generated deductions that were later disallowed by the Internal Revenue Service (IRS).  In December 1990, after being audited, the taxpayer received notification that he owed over $227,000 in taxes and penalties.  This amount was later corrected.  In January 1992, the taxpayer received a notice of deficiency indicating that he had accrued more than $700,000 in tax liability.  The taxpayer challenged the IRS calculation of his tax liability in a petition to the United States Tax Court.  In November 1992, the Tax Court entered judgment against the taxpayer in the amount of $209,113 in taxes and penalties, and $560,000 in interest.

In June 1992, the taxpayer established a trust, naming a series of family friend and business associates as the trustees and naming his two sons as the beneficiaries.  In the same month, he transferred approximately $220,000 to the trust and in October 1992 he transferred his primary residence, valued at $515,000, to the trust.  The taxpayer received no consideration and there was no evidence the trust assumed the individual taxpayer’s mortgage obligations. Pursuant to the transfer agreement, the taxpayer was allowed to live in the residence and was responsible for the expenses of the residence, including the mortgage and property taxes.  At the time of the transfer, the mortgage was scheduled to be paid off in five years; however, the transfer agreement did not specify an end date for the taxpayer’s occupancy.

At the bench trial held in 2005, the government advanced several theories for recovering assets from the trust, all of which were rejected by the District Court. The government appealed.  In 2008, the United States Court of Appeals for the Second Circuit reversed the judgment and remanded the case.  In its remand order, the Second Circuit directed the District Court to reconsider its findings with respect to whether the conveyances by the taxpayer to the trust were actually fraudulent, whether the trust held property as the taxpayer’s nominee and whether the trust was the taxpayer’s alter ego.

According to New York law, every conveyance made with “actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud” one’s creditors is fraudulent as to both present and future creditors.  N.Y. Debtor and Creditor Law § 276.  The primary issue is the intent of the debtor in making the conveyance, not the actual financial status of the debtor at the time of the conveyance.  The requisite intent required by this section does not need to be proven by direct evidence; it may be inferred from circumstances surrounding the allegedly fraudulent transfer.  Factors, known as “badges of fraud,” that a court may consider in determining fraudulent intent include: lack or inadequacy of consideration; close relationship between the transferor and the transferee; debtor’s retaining possession, benefit or use of the property; series of transactions after incurring the debt; the transferor’s knowledge of the creditor’s claim and the inability to pay it; the financial condition of the debtor before and after the transfer; and the shifting of assets to a corporation wholly owned by the debtor.  See Steinberg v. Levine, 6 A.D.3d 620 (N.Y. 2004); In re Kaiser, 722 F.2d 1574, 1582–83 (2d Cir.1983) (citations omitted).  To support a fraudulent conveyance finding, the creditor must have suffered some actual harm; however, actual harm may be found if the debtor depletes or diminishes the value of the assets of the debtor’s estate available to the creditors.  Lippe v. Bairnco Corp., 249 F.Supp.2d 357, 375 (S.D.N.Y. 2003)

The District Court found that the taxpayer was well aware of his tax liabilities and other potential demands on his assets when he transferred his residence and $220,000 to the trust in 1992.  Evidence of the taxpayer’s conduct at the time of the transfers supported the court’s finding that the taxpayer acted with the intention to hinder or delay collection of his assets. The taxpayer retained the benefits of ownership of the residence after it was transferred to the trust for no consideration.  His payments of mortgage and other property-related expenses, in lieu of rent, were the type of payments that would be made by a property owner, not a renter.  Much of the taxpayer’s net worth consisted of cash, which he was continually transferring among bank accounts held by family and close associates, as well as withdrawing to hold in an office safe. These transfers and withdrawals made it difficult for the IRS to locate and value the taxpayer’s assets.  The District Court also found that the transfers of cash and real estate to the trust unambiguously caused the requisite actual harm to his creditors by reducing the assets that the taxpayer had available to satisfy his tax debt and reducing the value of his readily accessible assets well below the amount of his tax debt.  After the transfers, the IRS would have had to collect between fifty and ninety percent of his remaining assets to satisfy his tax debt.  As a result of this analysis, the District Court found that the taxpayer’s intent to evade the IRS collection efforts was substantial and sufficient on its own; therefore, the court concluded that the taxpayer’s transfer of the residence and $220,000 to the trusts was actually fraudulent within the definition of New York law.  The remedy for fraudulent conveyance is that the creditor may collect upon the fraudulently conveyed property.  Therefore, the District Court held that the government may collect against the assets in the trust on this basis.

The nominee theory focuses on the relationship between the taxpayer and the property to determine whether a taxpayer has engaged in a legal fiction, for federal tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the property’s true owner. Richards v. United States, 231 B.R. 571, 578 (E.D.Pa.1999).  The overall objective of the nominee analysis is to determine whether the debor retained the practical benefits of ownership while transferring legal title.  Id. The critical consideration is whether the taxpayer exercised active or substantial control over the property.  Factors examined by the court include: (1) whether inadequate or no consideration was paid by the nominee; (2) whether the property was placed in the nominee’s name in anticipation of a liability while the transferor remains in control of the property; (3) where there is a close relationship between the nominee and the transferor; (4) whether they failed to record the conveyance; (5) whether the transferor retains possession; and (6) whether the transferor continues to enjoy the benefits of the transferred property.  Giardino v. United States, No. 96–CV–6348T, 1997 WL 1038197, at *2 (W.D.N.Y. Oct.29, 1997).  A nominee finding can be made even where there is no intent to defraud creditors or hinder collection efforts.  Where a nominee relationship is found, the government may access only the property held on the taxpayer’s behalf by the nominee and not all the property of the nominee.

The District Court found that the trust was the taxpayer’s nominee with respect to the residence only, and not with respect to the $220,000. The taxpayer had a close relationship with the trustees and the trust paid no consideration for the transfer of the residence. There was no evidence in the transfer agreement that the trust prevented the taxpayer from benefitting from the use and occupancy of the residence as much as when he held legal title to it.  The District Court found the evidence that the taxpayer made some payments relating to the property to be insufficient evidence to rebut the inference that he was the de facto owner of the property.  The payments that the taxpayer made in exchange for his occupancy were precisely those that an owner would make.  Once the mortgage was paid off, the taxpayer was only responsible for upkeep and expenses for the property; therefore, the trust received no net return from this asset.  The District Court considered that, were the trust acting as the owner of the property, it would have sought market rental rates that would have exceeded the taxpayer’s payments.  Therefore, the District Court found that the trust held the residence as the taxpayer’s nominee and that the government could recover the taxpayer’s debts against the residence under a nominee theory.

The alter ego theory differs from the nominee theory because the nominee theory focuses on the taxpayer’s control over and benefit from the actual property, while the alter ego theory emphasizes the taxpayer’s control over the entity that holds the property.  The alter ego doctrine arose from the law of corporations and allows the creditor to disregard the corporate form (also known as “piercing the corporate veil”) by either using an individual owner’s assets to satisfy a corporation’s debts or using the corporation’s assets to satisfy the individual owner’s debts.  Although the New York Court of Appeals has never held that the alter ego theory may be applied to reach assets held in trust, the District Court found no policy reason not to extend the application of veil piercing to trusts.  The policy behind piercing the corporate veil is to prevent a debtor from using the corporate form to unjustly avoid liability, which applies equally to trusts.  Therefore, the District Court held that the alter ego theory could be applied to the trust in the instant case.

To pierce the corporate veil in New York, a plaintiff must show that “(1) the owner exercised such control that the corporation has become a mere instrumentality of the owner, who is the real actor; (2) the owner used this control to commit a fraud or ‘other wrong’; and (3) the fraud or wrong results in an unjust loss or injury to the plaintiff.” Babitt v. Vebeliunas,332 F.3d 85, 91–92 (2d Cir.2003) (citations omitted); see also Wm. Passalacqua Builders, Inc. v. Resnick Developers S. Inc., 933 F.2d 131, 138 (2d Cir.1991).  With respect to analyzing the taxpayer’s control over the trust, the relevant factors can be drawn by analogy from the corporate context.  In analyzing the alter ego question as it relates to a corporation, courts consider factors such as the absence of formalities, the amount of business discretion displayed by the allegedly dominated corporation, whether the related corporations deal with the dominated corporation at arm’s length and whether the corporation in question had property that was used by other of the corporations as if it were its own. Vebeliunas,332 F.3d  at 91 n.3 (citation omitted).

The District Court that the trust was an alter ego of the taxpayer.  The trust formalities were so poorly observed as to give rise to the inference that the trust was not a bona fide independent entity. Between 1992 and 1998, the trust did not record the taxpayer’s payment of expenses for the residence as income and, during this period, the trust did not claim the mortgage interest deduction for the residence.  The individual taxpayer remained as the named beneficiary of the flood and fire insurance policies of the residence.  The accounting work for the trust was performed by a business associate of the taxpayer as a professional courtesy.  The trust tax statements were sent directly to the taxpayer instead of to the trustees. The District Court also found that the manner in which the trust was managed also demonstrate that it was an extension of the taxpayer because there was little evidence that the trustees were actively involved in managing the trust or its assets.  Having trustees play an active role in managing the trust is an important factor in deciding whether to respect the form of a trust because active involvement of trustees would support the separate existence of a trust. Dean v. United States, 987 F.Supp. 1160, 1165 (W.D.Mo.1997).  Finally, the taxpayer demonstrated his domination of the trust by controlling its property to a high degree.

Once the District Court found that the taxpayer controlled the trust, the next steps were to determine whether he used that control to commit a fraud or a wrong against the government, in its capacity as a creditor, and whether that wrong resulted in an unjust loss.  The court found these elements to be plainly satisfied by the facts and its previous findings with respect to actual fraudulent conveyance and the nominee doctrine.  Therefore, the District Court concluded that the existence of the trust as a separate entity was a legal fiction. Under the alter ego theory, the government may collect against all assets held by the trust as if they were held by the taxpayer himself.

Therefore, the District Court held that the government may proceed to collect against all the assets held by the trust that the taxpayer established for benefit of his sons in order to satisfy his delinquent tax liabilities.

Should you have any questions relating to trusts and other personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

United States v. Evseroff, 00-CV-06029 KAM, 2012 WL 1514860 (E.D.N.Y. Apr. 30, 2012)

Connecticut Homestead Exemption Requires Actual Occupation of the Property, Not Merely “Intent to Occupy”

In a recent case before the United States Bankruptcy Court for the District of Connecticut, the Chapter 7 trustee objected to an aggregate homestead exemption claimed by debtors for property that they owned, but did not occupy, at the time they filed for bankruptcy.  The court sustained the objection and denied the homestead exemption.

In August 2010, SunTrust Bank (“SunTrust”) commenced a foreclosure action against a property owned in Norwalk, Connecticut by a married couple (“the debtors”).  The debtors and their children resided at this property as their primary residence until January 2011, when they rented the property to a third party for one-year under the terms of a residential lease.

Prior to the foreclosure sale in August 2011, the debtors filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 701 et seq. The debtors testified that when they filed for bankruptcy relief they were residing with a relative at a street address other than the property being foreclosed upon.  Pursuant to 11 U.S.C.§ 522(b)(3), the debtors amended their bankruptcy filing to claim personal exemptions allowed by Connecticut state law. Among the exemptions was a $150,000 aggregate homestead exemption.  See Conn. Gen. Stat. § 52–352b(t) (2009).  The trustee objected to the homestead exemption.

In Connecticut, any “natural person” is entitled to claim an exemption for his homestead up to $75,000, which is calculated based on the fair market value of the property less the amount of any statutory or consensual lien.  Conn. Gen. Stat. § 52–352b(t) (2009).   A “homestead” is defined as “owner-occupied real property … used as a primary residence.” Id. at § 52–352a (e) (2005)   Case law has further refined this definition to establish three requirements for real property to constitute an individual’s statutory homestead: (1) the individual must “own” the subject real property within the meaning of Section 52–352a as of the relevant time; (2) the individual must “occup[y] ” the subject real property within the meaning of Section 52–352a as of the relevant time; and (3) the subject real property must be “used as a primary residence” within the meaning of Section 52–352a as of the relevant time.  In re Kujan, 286 B.R. 216, 220–21 (Bankr.D.Conn.2002); see also KLC, Inc. v. Trayner, 426 F.3d 172, 175 (2d Cir. 2005) (citing Kujan as “setting out ‘homestead’ requirements for invocation of homestead exemption”).

The issue before the Bankruptcy Court was whether the debtors occupied the property within the meaning of Connecticut General Statute § 52–352a. Neither party disputed that the debtors owned the property; likewise, the Chapter 7 petition evidenced that the debtors were not using the property as their “primary residence” on the date of the filing of their petition.

The debtors argued that the word “occupy” must be broadly construed. They claimed that, even though they were not occupying the property, it was a temporary situation because they intended to move back when the one-year lease expired. The debtors testified that the property was rented solely because the family was experiencing financial problems.  Finally, the debtors argued that they had not completely surrendered occupation of the property because they reserved the right to access storage areas in the attic and the basement to retrieve stored personal property during the term of the lease.  However, this access agreement was not contained in the lease and was contrary to an explicit lease provision granting the renters quiet enjoyment of the property.

The Bankruptcy Court held that the essence of a “homestead” would be nullified if they construed the requirement to “occupy” to include an “intention to occupy.”  Even if the debtors were permitted to access areas of the property, they had given up the right to use the property as a home eight months before they filed their Chapter 7 case.  Therefore, the debtors no longer occupied the property in the sense required by Connecticut statutory and common law.

Because the Bankruptcy Court found that the debtors did not occupy the property when they filed for bankruptcy protection, the property did not satisfy the tripartite requirements to classify for a homestead exemption in Connecticut.  Therefore, the court sustained the trustee’s objection to the claimed homestead exemption.

In re Taliercio, 11-51732, 2012 WL 441421 (Bankr. D. Conn. Feb. 10, 2012)

Should you have any questions relating to bankruptcy or personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Owners of a Limited Liability Company Cannot Claim Homestead Exemption for Real Property Held by the LLC

In a case before the United States Bankruptcy Court for the District of Connecticut, the Chapter 7 trustee objected to an aggregate homestead exemption claimed by the debtors for property owned by a limited liability company that they controlled at the time of the bankruptcy filing. The court sustained the objection and denied the homestead exemption.

The debtors were joint owners of Kochman Holdings Group, LLC (“the LLC”), which was a single asset real estate holding company established to hold title to a two-story building in West Cornwall, Connecticut. The first floor of the building was used by the debtors to conduct their respective businesses.  A portion of second floor of the building was used as the debtors’ residence, and the remainder of the second floor was used for unspecified personal and business purposes.

In January 2011, the debtors filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 701 et seq.  The petition listed their street address as the address of the building owned by the LLC. Pursuant to 11 U.S.C.§ 522(b)(3), the debtors listed personal exemptions allowed by state law, including an aggregate homestead exemption for their primary residence.  See Conn. Gen. Stat. § 52-352b(t) (2009).  The debtors calculated the value of their exemption to be approximately $88,000, which was the total net equity in the building owned by the LLC.  The trustee objected to the homestead exemption.

In Connecticut, any “natural person” is entitled to claim an exemption for his homestead up to $75,000, which is calculated based on the fair market value of the property less the amount of any statutory or consensual lien.  Conn. Gen. Stat. § 52–352b(t) (2009).  A “homestead” is defined as “owner-occupied real property … used as a primary residence.” Id. at § 52–352a (e) (2005)   Case law has further refined this definition to establish three requirements for real property to constitute an individual’s statutory homestead: (1) the individual must “own[ ]” the subject real property within the meaning of Section 52–352a as of the relevant time; (2) the individual must “occup[y] ” the subject real property within the meaning of Section 52–352a as of the relevant time; and (3) the subject real property must be “used as a primary residence” within the meaning of Section 52–352a as of the relevant time. In re Kujan, 286 B.R. 216, 220–21 (Bankr.D.Conn.2002); see also KLC, Inc. v. Trayner, 426 F.3d 172, 175 (2d Cir. 2005) (citing Kujan as “setting out ‘homestead’ requirements for invocation of homestead exemption”).

The exemptions afforded by Section 52-352a only apply to the property of persons, not artificial entities. Shawmut Bank, N.A. v. Valley Farms, et al., 222 Conn. 361, 366 (1992).  When a person elects to own assets through an artificial entity for a legal advantage, such as limiting personal liability, he must accept the corresponding legal disadvantage arising from the limitation of Section 52-352a. Id.

The debtors admitted that the property for which they were claiming a homestead exemption was owned by the LLC.  However, the debtors argued that the equitable doctrine of reverse piercing of the corporate veil should be applied so that they, as sole joint owners of the LLC, could be considered owners of the property for the purposes of claiming the homestead exemption.  The debtors testified that forming an LLC and putting legal title to the property in the name of the LLC were good faith technical transactions that they executed upon the advice of their attorney with no understanding of the implications.

The Bankruptcy Court rejected the debtors’ argument.  In recommending an LLC to hold title to the property, the debtors’ attorney fully understood that the benefits of such an arrangement included preventing the debtors’ individual creditors from reaching the property.  An individual cannot place ownership of a property in an artificial entity so as to be unreachable by his individual creditors, and then later assert ownership of the property so as to be entitled to claim a homestead exemption in it.  The court reinforced precedent by asserting that when an individual choose to take advantage of the benefits of an artificial entity, he must also bear the corresponding burdens.  Because the LLC, and not the debtors, owned the property, the Bankruptcy Court found no basis for the debtors to claim a homestead exemption.

The Bankruptcy Court made the additional finding that, even if the debtors were entitled to claim a homestead exemption, the claim of $88,000 was “patently objectionable” because it represented the entire net equity in the property.  Only the net equity in the portion of the property used as a primary residence could be claimed as a homestead exemption. Because the record contained no evidence as to the value of the residential portion, the Bankruptcy Court would be unable to calculate the value of the homestead exemption, had the exemption been allowed.

Because the Bankruptcy Court found that the debtors did not own the property at the time they filed for bankruptcy protection, they could not claim a homestead exemption in the property.  Therefore, the court sustained the trustee’s objection to the claimed homestead exemption.

Should you have any questions relating to bankruptcy or asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Trusts Created For Personal Benefit Are Not Exempt From Judgment Creditors

In a case before the Superior Court of Connecticut, a judgment creditor objected to the debtor’s claim of exemption for a bank account that was standing in the name of a family living trust.  The court sustained the objection and denied the exemption.

In July 2011, a judgment was entered for Karl Estes, as the custodian of the Karl G. Estes IRA, (“judgment creditor”) against Timothy Crowley (“debtor”).  The Superior Court of Connecticut issued an execution that was served upon the bank where the debtor maintained a “High Yield Consumer Savings Account” in the name of his family living trust.  The total balance of the account was removed toward satisfying the judgment, in accordance with Conn. Gen. Stat. § 52-367b(c) (2009).  The debtor then filed a claim of exemption, classifying the account as a “private pension, trust, retirement or medical savings account” under Conn. Gen. Stat. §§ 52-321a, 52-352b(m) (2009).

According to the living trust agreement establishing the debtor’s family living trust, the debtor and his wife were both grantors and trustees of the trust.  The trust was for the benefit of the two grantors and their children. The trust was divided into two grantor’s separate shares, one for each grantor, and each share consisted of an undivided one-half beneficial interest in the trust assets. During the lives of both grantors, all distributions of income and principal from the trust estate would be made one-half from each grantor’s separate share. During their joint lifetimes, the trustees had the power to pay to or apply all or part of the principal and income of each grantor’s separate share for the benefit of each grantor. The majority of the funds in the family living trust were from an IRS refund issued in connection with the debtor and his wife’s joint federal income tax return.

Connecticut law exempts any “assets or interests of an exemptioner in, or payments received by the exemptioner from, a plan or arrangement described in Section 52-321a.” Conn. Gen. Stat. §§ 52–352b(m).  However, the statute that describes which assets are unavailable to creditors, Conn. Gen. Stat. §52–321a, limits the definition to trusts or other instruments that were established as part of retirement plans or other plans qualified under various sections of the Internal Revenue Code. Such plans are “conclusively presumed to be a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under the laws of this state.”  Id. The court found that the family living trust at issue was not a plan or arrangement described by the relevant statutes and, therefore, was not entitled to exemption from a judgment creditor on these bases.

In the alternative, the debtor argued that even if the family living trust was not entitled to exemption, the income could not be subjected to claims of creditors based on Conn. Gen. Stat. § 52-321(a).  This statute states that non-exempt income can be subject to the claims of creditors of a beneficiary only “if the property has been given to trustees to pay over the income to any person without provision for accumulation or express authorization to the trustees to withhold the income.”  The debtor argued that, given the powers of the trustees as defined in the living trust agreement, the trust income could not be subjected to the claims of creditors; therefore, the income must be exempt.

The court reached the opposite conclusion and held that the cited statute does not apply to the living trust at issue, because it was a discretionary trust established by grantors for their own benefit.  As a matter of public policy, this family living trust cannot enjoy the exemption afforded to a spendthrift trust; and as a matter of statutory interpretation, the exceptional provisions governing the liability of the income of trust find to creditors does not apply to the income of this trust. Conn. Gen. Stat. § 52–321(a). Connecticut common law has interpreted the statutory predecessor of Section 52-321(a) to mean that a trust created by a person for his own benefit cannot qualify as a “spendthrift trust” that is beyond the reach of his creditors.   See Greenwich Trust Company v. Tyson, 129 Conn. 211, 219 (1942).  The income generated by such a trust is also not protected from the just claims of creditors.  Id. at 222.

The court denied the debtor’s claim of exemption, and permitted the amount removed from the bank account standing in the name of the family living trust to be applied to the satisfaction of the judgment held by the judgment creditor.

Estes v. Crowley, FSTCV114021004S, 2011 WL 5841857 (Conn. Super. Ct. Oct. 26, 2011)

Should you have any questions relating to living trusts or other personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.