New York law allows individuals to limit their liability to creditors by arranging their affairs in a manner that legally protects their assets. One of the ways this is accomplished is by “making irrevocable transfers of their assets, outright or in trust, as long as such transfers are not in fraud of existing creditors . . .” (Matter of the Joseph Heller Inter Vivos Trust, 613 Misc 2d 369 [Sur Ct, 1994]). The circumstances under which a trust’s assets will be validly protected are limited to the existence of specific parameters in the trust instrument.
According to EPTL §7-3.1, “[a] disposition in trust for the use of the creator is void as against the existing or subsequent creditors of the creator.” In other words, an individual cannot transfer his or her assets to a trust and continue to retain control or enjoy the benefits of that trust, while simultaneously enjoying protection from creditors. Instead, transfers to irrevocable trusts will only be deemed valid for purposes of sheltering the assets from creditors where the grantor does not reserve a power to revoke the trusts or to dispose of the property during his lifetime, and where the transfers to the trust did not make the grantor insolvent (see Matter of Granwell, 20 NY2d 91 ; Debtor Creditor Law §273).
A transfer resulting in the grantor’s insolvency or one that is made while the grantor is already insolvent may be deemed a fraudulent conveyance (see Debtor Creditor Law §273). In such cases, the creditors may set aside conveyances and reach the assets. But if trust assets remain available for the grantor’s benefit, creditors need not establish fraud to invalidate the transfer (see Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 [2d Dept 1984]; Colgate v Guaranty Trust Co. of New York, 159 Misc 664, 666 [Sup Ct, New York County 1936]). For example, in Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 (2d Dept 1984), the Appellate Division held that trust assets are not protected from creditors if the trustee has discretion to make payments to the grantor (see Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 [2d Dept 1984]).
Not surprisingly, this concept extends beyond the life of the trust settlor and remains applicable to his or her estate. Indeed, courts recognize that where an individual reserves the power to dispose of trust property during his or her lifetime, “he or she must be regarded as the absolute owner of the funds until death and those funds would be therefore available to pay estate debts” (Estate of Hughes, 3/20/2003 NYLJ 23 [col 2] [Sur Ct, Kings County], citing Matter of Granwell, 20 NY2d 91 ; Matter of Batiste, 5/4/99 NYLJ 30 [col 6]). Also notable is the fact that, "any property covered by a general power of appointment which is presently exercisable, or a postponed power which has become exercisable, is subject to creditors’ claims" (Estate of Chappell, 7/24/09 NYLJ 26 [col 1] [Sur Ct, New York County], citing EPTL §10-7.2).
In light of the foregoing, it is clear that individuals may legally protect their assets from the claims of creditors, provided they are willing to forego the control and benefits of the funds and of course, do not transfer their assets fraudulently.