In re: Mortensen, No. A09-90036-DMD (Bankr. D. Alaska, May 26, 2011).
Can a trustee challenge the transfer of property to a trust? A recent Alaska bankruptcy decision dealt with this issue, and held that it was possible.
In 1994, debtor Thomas Mortensen purchased 1.25 acres of remote land in Alaska for $50,000. He later improved the property, building structures, a well, and a septic system. After filing for Chapter 7 bankruptcy protection, he transferred the property to a trust without telling the court. The trustee in the case challenged his transfer to the trust as a fraudulent conveyance.
Under Alaska law, it is possible to establish a valid asset protection trust, to avoid creditors receiving access to your property. However, under the Bankruptcy Code, a transfer within the 10 years prior to a bankruptcy filing of property to a self-settled trust of which the debtor is a beneficiary in order to defraud creditors, is avoidable by the trustee. This provision was added to the Code so that you cannot use state trust law to avoid paying your debts.
In this case, Mortensen said he created the trust not to avoid paying creditors, but to preserve property for his children. However, the court found that he did intend to defraud creditors because he only created the trust as his financial condition became worse.
