Setting up a trust before a lawsuit begins but after a car accident requires careful consideration under New York law, as it could still be scrutinized as a fraudulent conveyance if it is deemed an attempt to avoid creditors or potential liabilities. Below is a breakdown of the key factors and considerations:
1. Timing is Critical
If the trust is created before a lawsuit is filed, it may provide some level of asset protection. However, the following factors will still be evaluated:
- Intent: Courts will examine whether the trust was created with the specific intent of avoiding potential creditors, including the person injured in the accident.
- Timing Relative to the Accident: Creating a trust immediately after an accident, but before a lawsuit, can raise suspicion of intent to defraud creditors. If the timing suggests the trust was designed to shield assets from an anticipated claim, courts can invalidate the transfer.
- Fraudulent Conveyance Laws: New York’s Debtor and Creditor Law (§ 270-281) allows courts to unwind transfers made with the intent to “hinder, delay, or defraud” creditors, even if a lawsuit has not yet been filed.
2. Irrevocable Trusts
An irrevocable trust can shield assets because once assets are transferred to such a trust, you no longer have ownership or control over them. However:
- The trust must be set up properly, with clear terms, and assets must be transferred before any liability arises or the threat of litigation becomes foreseeable.
- If the trust is deemed fraudulent, courts can still order the assets returned to satisfy creditors.
Best Practices for Setting Up an Irrevocable Trust:
- Timing: Establish the trust as part of a long-term estate or asset protection plan, well before any accident or liability occurs.
- Trustee Selection: Appoint an independent trustee to manage the trust, ensuring it is not seen as a sham.
- Beneficiaries: Ensure the trust’s beneficiaries are properly designated and unrelated to any creditor concerns.
3. Domestic Asset Protection Trusts (DAPTs)
While New York does not allow Domestic Asset Protection Trusts, you may create one in another state (e.g., Nevada, Delaware, or South Dakota), which permits DAPTs.
4. Insurance as First Defense
Before relying on a trust for protection, ensure you have sufficient insurance coverage, including:
- Auto Insurance: Ensure you have high liability limits.
- Umbrella Insurance: Provides additional coverage beyond your auto insurance and can help protect your personal assets.
5. What Courts Will Look At
If the trust is challenged, the court will consider the following:
- Reasonable Anticipation of Litigation: Was the trust created after you knew or should have known litigation was likely?
- Solvency After the Transfer: Did the transfer to the trust leave you insolvent or unable to meet foreseeable obligations?
- Good Faith: Was the trust part of a legitimate estate or financial planning strategy, or solely to evade creditors?
6. Other Considerations
- Exempt Assets: Certain assets, such as retirement accounts, annuities, and homestead property, may already have creditor protection under New York law.
- Ongoing Contributions: If you contribute additional assets to the trust after the accident, those contributions are likely to face greater scrutiny.
Summary of Best Practices:
- Establish the trust as part of a long-term financial strategy and not in reaction to an accident or litigation.
- Use an irrevocable trust for stronger protection, but understand the risks if it appears to be a fraudulent transfer.
- Consider out-of-state options like DAPTs but be aware of potential limitations in New York.
- Consult with an experienced estate planning and asset protection attorney to structure the trust properly and assess your specific circumstances.
