Introduction. Assume an owner of property gratuitously transfers it in trust to an independent trustee, expressly reserving to himself no powers, whether fiduciary or non-fiduciary. Also assume this is not to be a statutory domestic asset protection trust (DAPT). At time of transfer the settlor is not only solvent but also creditor-free. Sometime post transfer settlor incurs debt that renders him insolvent. May his post-transfer (“future”) creditors reach the entrusted property? Had settlor reserved even a contingent interest in the principal, most likely. If not, possibly.

Non-fraudulent entrustment with reserved beneficial interest. Assume terms of this non-DAPT grant independent trustee full discretion to invade/ not invade principal for settlor’s benefit. Settlor’s equitable property interest is contingent, it being subject to condition precedent of exercise of trustee discretion. The principal is available to the settlor’s future creditors, and, quite possibly, to future postmortem creditors as well. Availability is subject neither to entrustment being fraudulent nor trustee ever actually making distributions to the settlor. See §5.3.3.1 of Loring and Rounds: A Trustee’s Handbook (2023), which section is set forth in appendix below. Handbook available for purchase at https://law-store.wolterskluwer.com/s/product/loring-rounds-trustees-hanbook-2023e/01t4R00000Ojr97QAB.

Entrustment with no reserved beneficial interest. Here fraudulent-conveyance doctrine is implicated. See my 2/14/23 JDSUPRA posting entitled “Intersection of Fraudulent Conveyance Doctrine and the Law of Trusts,” accessible below among the links to my previous JDSUPRA postings. Future creditors have two paths to restitution, equitable and statutory. The former via unjust enrichment doctrine, the latter via the Uniform Voidable Transactions Act (2014), or a precursor statute.

Unjust enrichment. Even one unjustly enriched through no fault of his own may be compelled in equity to make restitution. Take someone who disadvantages his current creditors by transferring his property to an innocent trustee for the benefit of innocent third parties. The court may convert the express trustee into a constructive trustee for the benefit of the creditors, thus depriving the innocent but unjustly enriched third parties of their equitable interests. See Restatement of Property §123 (1936). Here, however, it is hard to see how a future creditor could be a victim of unjust enrichment even if the settlor had fraudulently hidden from the creditor the settlor’s lack of creditworthiness, the donative transfer in trust having been completed before the settlor began incurring debt. To retroactively deem an innocent trust beneficiary’s enrichment “unjust” seems, well, inequitable. So much more so if there has been a reasonable change of position on his part. At best, as between innocent future creditors and innocent third-party trust beneficiaries, the equities are equal. And “when there is equal equity, the law shall prevail.” Let’s then pull up the prevailing statutory law.

Uniform Voidable Transactions Act (2014) (UVTA). UVTA §4(a)(1) accommodates not only a debtor’s current creditors but also his future creditors, whether foreseeable or unforeseeable at time of transfer, provided debtor “actually” had then intended to hinder, delay, or defraud them. The underpinning creditor-friendly policy is traceable to the Statute of 13 Elizabeth (1571). “Numerous state courts have held that a future creditor may seek relief under the fraudulent transfer law, without any requirement that the future creditor be a foreseeable future creditor.” David J. Slenn, The Fraudulent Transfer of Wealth 88 (ABA 2022). At least one jurisdiction, however, is not in accord. See Conn. Gen. Stat. Ann. Section 52-552e.