Trust Assets Included in Settlors’ Bankruptcy Estate, Special Power of Appointment Permitting Appointment of Assets to or for Settlors (“SPAT”) Supported Application of the Ten-Year Lookback
The Bankruptcy Court included assets held in an irrevocable trust for the settlor’s children in the settlors’ bankruptcy estate even though the settlors were not named beneficiaries. The settlors’ son could appoint the settlors as beneficiaries of the trust or could revoke the trust and distribute the trust assets to them. (That type of trust is sometimes referred to as a Special Power of Appointment Trust, or “SPAT.”) On that basis, the court treated the settlors as “contingent beneficiaries,” and therefore as “beneficiaries,” for purposes of the Bankruptcy Code’s ten-year lookback rule. Numerous unfavorable facts indicated that the settlors continued to use the trust assets even though they were not named beneficiaries and that the transfer to the trust was made with the intent to hinder, delay, or defraud creditors. Under the reasoning of this case, using a SPAT approach in structuring a trust may risk application of the ten-year lookback rule if the settlor ends up in bankruptcy.
