{"id":3099,"date":"2021-12-14T23:02:00","date_gmt":"2021-12-14T23:02:00","guid":{"rendered":"https:\/\/socal.law\/?p=3099"},"modified":"2022-06-21T20:35:46","modified_gmt":"2022-06-21T20:35:46","slug":"in-trusts-we-trust-applying-the-alter-ego-doctrine-to-trusts","status":"publish","type":"post","link":"https:\/\/socal.law\/in-trusts-we-trust-applying-the-alter-ego-doctrine-to-trusts\/","title":{"rendered":"In Trusts We Trust?: Applying the Alter Ego Doctrine to Trusts"},"content":{"rendered":"\n

Most attorneys are familiar with the rigamarole that comes with attempting to reach assets held by the principals of a business entity as a part of analyzing whether a judgment will be collectible\u2014that is, whether the alter ego doctrine will apply such that the creditor may \u201cpierce the corporate veil.\u201d  However, the rules for whether a judgment creditor may \u201cpierce the veil\u201d of a trust<\/em> to reach the settlor behind that trust are a bit quirkier.   <\/p>\n\n\n\n

Indeed, most of the time when trusts are involved, the creditor is interest in proceeding the opposite direction\u2014that is, reaching the assets held in trust for the benefit of a judgment debtor.  Regardless of which direction the creditor may be going, this article discusses the rules of the road for collecting from individual via trust, and trust via individual. <\/p>\n\n\n\n

First, it should be noted that the alter ego doctrine doesn\u2019t even come into play where a judgment debtor transfers assets into a revocable trust.  In that scenario, the judgment creditor can attach and collect upon the assets in the trust because they are treated as assets of the judgment debtor regardless of their placement into a revocable trust.  See <\/em>Bank One Texas v. Pollack<\/em>, 24 Cal. App. 4th 973, 980 (1994)<\/a>; Gagan v. Gouyd<\/em>, 73 Cal. App. 4th 835, 842 (1999)<\/a>, disapproved on other grounds in\u202f<\/em>Mejia v. Reed<\/em>,\u202f31 Cal. 4th\u202f657, 669 (2003)<\/a>; see also <\/em>Prob. Code \u00a7 18200<\/a> (\u201cProperty in a revocable trust is subject to creditor claims to the extent of the debtor\u2019s power of revocation.\u201d).     <\/p>\n\n\n\n

Second, although the alter ego doctrine has been analyzed in the context of trusts rather than business entities, the California Court of Appeal has been careful to note that trusts are in fact not legal entities at all: \u201c\u2018[A] trust is not a legal person which can own property or enter into contracts . . . It is the trustee or trustees who hold title to the assets that make up the trust estate . . . . [Therefore,] legal proceedings are properly directed at the trustee.\u2019\u201d  Greenspan v. LADT LLC<\/em>, 191 Cal. App. 4th 486, 521 (2010)<\/a> (quoting Neno & Sullivan, Planning and Defending Domestic Asset-Protection Trusts<\/em>, Planning Techniques for Large Estates (Apr. 26-30, 2010) SRO34 ALI-ABA 1825, 1869-70)).  Moreover, \u201c[b]ecause a trust is not an entity, it is impossible for a trust to be anybody\u2019s alter ego.\u2019\u201d  Id. <\/em>at 522.  However, the Court of Appeal did find that \u201capplying the [alter ego] doctrine to trustees<\/em>\u201d was acceptable because \u201cit\u2019s entirely reasonable to ask whether a trustee is the alter ego of a defendant who made a transfer into the trust.\u201d  Id.<\/em>  The court in Greenspan<\/em> concluded that alter ego doctrine could be applied to a third-party trustee of an irrevocable trust as the potential alter ego of the debtor settlor.  Id. <\/em> <\/p>\n\n\n\n

The Ninth Circuit, applying California law a month before Greenspan<\/em>, reached a similar conclusion in In re Schwarzkopf<\/em>, 626 F.3d 1032 (2010)<\/a>, with a slight variation: the trust itself, rather than the trustee, can be considered the alter ego of a debtor settlor.  In Schwarzkopf<\/em>, the debtor transferred assets to two irrevocable trusts, naming his minor child as beneficiary and a third party as trustee, but, as to the second trust, \u201c\u2018dominated and controlled all decisions of the . . . Trust.\u2019\u201d  Id.<\/em> at 1039.  The Ninth Circuit first held that the California court\u2019s then-current rule1 against \u201creverse veil piercing\u201d\u2014that is, attaching the assets of a corporation to satisfy the debts of a shareholder\u2014did not prevent them from considering whether \u201creverse piercing\u201d could be allowed in a trust context.  See id. <\/em>at 1038 (\u201cIn the absence of further guidance from California courts, therefore, we cannot extend the prohibition on reverse piercing to the trust context.\u201d).  The court went on to hold that \u201cunder California law, equitable ownership in a trust is sufficient to meet the ownership requirement for purposes of alter ego liability.\u201d  Id. <\/em> Although the debtor was not the beneficiary of the trust, nor the trustee, the court still found that the debtor was \u201can equitable owner of the . . . Trust because he acted as owner of the trust and its assets\u201d because he essentially dictated the actions of the trust to the trustee.  Id.<\/em>  Accordingly, the Ninth Circuit held that \u201cthe bankruptcy court did not err in finding that the . . . Trust is [debtor settlor\u2019s] alter ego.\u201d  Id.<\/em> at 1040. <\/p>\n\n\n\n

But what if the debtor is the trust<\/em>\u2014or, more accurately, per the admonitions in Greenspan<\/em>, the trustee\u2014and the creditor wants to reach the assets of the settlor as the debtor trust\/trustee\u2019s alter ego?  To this author\u2019s knowledge, there has been no California or Ninth Circuit case directly answering this question.  One can surmise this is because trusts are used as the vehicle to shield assets of individuals and entities, and do not often themselves incur liabilities.  However, it stands to reason that if a trustee of an irrevocable trust can be the alter ego of a debtor settlor per Greenspan<\/em>, and an irrevocable trust itself can be the alter ego of a debtor settlor per Schwarzkopf<\/em>, then the converse is also true\u2014that is, a settlor can be the alter ego of a debtor trust or trustee.  In other words, alter ego liability would seem to imply a two-way street: the trust\/trustee is the settlor and the settlor is the trust\/trustee.  The waters seem to get murkier if one swaps in the trust beneficiary<\/em> for the settlor in the foregoing analysis.  However, the Schwarzkopf<\/em> court\u2019s emphasis on equitable title as forming the basis for alter ego liability would seem to suggest that beneficiaries would be subject to the same rules as Greenspan <\/em>and Schwarzkopf<\/em>, as well as the potential extension of those opinions to the converse rule.  See Walgren v. Dolan<\/em>, 226 Cal. App. 3d 572, 576 (1990) (\u201c[T]he beneficiary [of a trust] holds only equitable title . . . .\u201d).  Of course, the Ninth Circuit\u2019s focus on equitable title, and the California Court of Appeal\u2019s focus on the separation of trust and trustee, could result in a split between state and federal courts in California in how they each handle the trust to settlor liability question. <\/p>\n\n\n\n

In short, the current state of the law regarding trust alter ego theories is as follows: <\/p>\n\n\n\n

  1. Debtor = settlor of revocable trust \u2192<\/strong> assets of trust collectible, no alter ego showing required <\/li>
  2. Debtor = settlor of irrevocable trust \u2192<\/strong> assets of trust collectible upon alter ego showing <\/li>
  3. Debtor = trust or trustee \u2192<\/strong> assets of settlor likely collectible <\/li>
  4. Debtor = trust or trustee \u2192<\/strong> assets of beneficiary may be collectible <\/li><\/ol>\n\n\n\n

    Scenarios 3 and 4 above may remain opaque until the unique scenario of an asset-poor trust and an asset rich beneficiary or settlor come before a relevant court of appeal, but given the relative rarity of that fact pattern, litigants that find themselves in that scenario will likely have to argue by analogy to the existing rules of Greenspan <\/em>and Schwarzkopf<\/em>.  <\/p>\n\n\n\n

    Author: Jake Ayres<\/h4>\n\n\n\n

    <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    judgment creditor may \u201cpierce the veil\u201d of a\u00a0trust\u00a0to reach the settlor behind that trust are a bit quirkier.<\/p>\n","protected":false},"author":8,"featured_media":3755,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16,37],"tags":[57],"yoast_head":"\nIn Trusts we Trust - Gupta Evans and Ayres<\/title>\n<meta name=\"description\" content=\"The rules for whether a judgment creditor may \u201cpierce the veil\u201d of Trusts\u00a0to reach the settlor behind that trust are a bit quirky.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/socal.law\/in-trusts-we-trust-applying-the-alter-ego-doctrine-to-trusts\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"In Trusts we Trust - 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