The Correct Choice of Law Provision in a Trust Can Thwart Asset Reach by a Bankruptcy Trustee and Protect Surviving Beneficiaries – Los Angeles Income Tax Planning and Asset Protection Plan Attorney Bruce Givner

by Bruce Givner on February 7, 2013

In 1978, Sally Zukerkorn created a fully revocable Trust which contained a choice of law clause granting jurisdiction to Hawaii. Four years later, Zukerkom amended the Trust to split into two separate Trusts for her two sons upon her death.

After Zukerkom’s death, son Herbert sold Zukerkom’s real estate and placed $2 million of the proceeds into his Trust. In 2010, Herbert and his wife filed for Chapter 7 relief in bankruptcy in California where they resided. Claiming that Hawaii law governed his interest in the Trust, Herbert valued his interest in the Trust at zero, even though he received around $12 thousand in combined income from the Trust.

The Bankruptcy Trustee filed a Turnover Motion for 25% of the Trust distribution and contended that California, not Hawaii, law applied.

Under California law, the bankruptcy trustee was entitled to 25% of Trust distributions. Under Hawaii law, the bankruptcy trustee was entitled to none of the distributions.

After the Bankruptcy Court ruled in favor of Herbert, the Trustee appealed to the Bankruptcy Appellate Panel of the 9th Circuit. In a 2-1 holding, the Bankruptcy Court ruling was affirmed.

The Bankruptcy Appellate Panel held that for many reasons, including the fact that the Trust was created in Hawaii and the real estate was originally maintained in Hawaii, Hawaii, and not California, had a substantial relation to the trust and thus the choice of Hawaii law to govern the trust was reasonable. Further, since the trust was self-settled in relation to Sally, but not Herbert, the trust is not void and against California’s public policy giving California an interest in seeing creditors access a portion of Herbert’s interest. In re Zukerkorn.

This case is of very limited application: the debtor, Herbert, did not create the trust; It was created by his mother for his benefit. Therefore, California – the state of the debtor’s residence – did not have a public policy interest in having creditor’s seize Herbert’s interest in the trust. The Appellate Court would have reached a different result had Herbert created the trust for his own benefit.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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