Frank and Geryl Pearl were husband and wife. Frank owned, directly or indirectly, interests in three LLCs: Perseuspur LLC (Perseuspur), which owned Perseus Holding LLC (Holding), which itself owned Persues LLC.
On September 30, 2010, TD Bank gave the LLCs a $17.5 million unsecured credit facility, which was personally guaranteed by Frank. To get the loan, Frank provided TD Bank with financial statements showing that he was worth $420 million in 2009 and 380 million in 2010.
In November, 2011, Frank learned that he had terminal lung cancer.
Apparently getting his affairs in order, Frank created the Perseus Trust to operate his interests in the LLCs and pay the proceeds to Geryl. The trust was revocable as to Frank during what remained of his lifetime, but not to Geryl.
Frank then sought to restructure the TD Bank loans. TD Bank balked at first, but by March, 2012, had agreed that Holding would take the place of Perseus and Frank would remain the guarantor.
Frank died on lung cancer on May 4, 2012. Frank's death was an "event of default" under the TD Bank agreement, and TD Bank brought suit against Frank's estate for $16.4 million.
Essentially, TD Bank claimed that Frank's creation and funding of the Perseus Trust was a fraudulent transfer, and TD Bank sought a money judgment against Geryl as the beneficiary of the trust, for the $16.4 million owed by Frank's estate.
TD Bank sought a preliminary injunction to keep Geryl from selling or transferring any of the assets.
The Court essentially ruled that because Frank created a revocable trust, the assets were available to the creditors of his estate, although they would not be available to Geryl's creditors. Thus,
The upshot is that the creation and funding of the Perseus Trust did not subtract from the assets actually available to Mr. Pearl's creditors. Before and after the transfer, the universe of reachable assets remained, for all practical purposes, exactly the same. For this reason, it is strange that TD Bank insists on arguing that Mr. Pearl, who by TD Bank's own account was a highly sophisticated financial actor, somehow intended to stymie the claims of creditors when he created the Perseus Trust. If that was Mr. Pearl's intent, there were far better tools at his disposal than a revocable trust, which, to reiterate, did not and could not operate to shield assets from the claims of his creditors under District of Columbia law. To the contrary, the weight of the evidence in the record would lead a reasonable factfinder to conclude—consistent with the principle that a revocable trust is a perfectly valid and appropriate estate management tool—that Mr. Pearl simply intended to fashion a structure for the efficient and orderly transfer of his ownership and management interests upon his death.
The Court also rejected TD Bank's claims that Frank's transfer of assets to the Perseus Trust was a "constructively fraudulent" transfer. There are basically two elements to such a claim: (1) the transfer was not for reasonably equivalent value, i.e., the debtor did not get back something of equal value to creditors, and (2) the debtor was either insolvent or the transfer rendered the debtor insolvent.
But, the same logic deflated TD Bank's claims -- since the trust was revocable, the assets transferred to the trust were still available to Frank's creditors.
In other words, practically speaking, the creation and funding of the Perseus Trust in no way subtracted from the assets available to Mr. Pearl's creditors upon his death. The same assets remain reachable by creditors, including TD Bank.
Because, in the final analysis, TD Bank could not show that it was at risk of suffering imminent harm (or any harm) by Frank's transfers to the Perseus Trust, the Preliminary Injunction was denied.
A Bit Of Analysis
This case is instructive as to what a revocable trust (a/k/a "living trust") does and does not do with regard to asset protection. The laws of most states provide that the assets that are conveyed to a revocable trust are available to the settlor's assets during his or her lifetime, and then are available to the creditors of his or her estate upon death.
In other words, revocable trusts do not provide any protection to the assets of the settlor, either before or after death. Indeed, the primary purpose of revocable trusts is not asset protection, but rather to avoid the expense of probate and/or for privacy purposes.
However, it should not be overlooked that a revocable trust can provide near-absolute asset protection to the beneficiaries of the trust after the settlor dies, so long as the trust is well-drafted, has only discretionary distribution, and a solid spendthrift clause. What is no protection for the settlor almost magically turns into fantastic protection for beneficiaries after the settlor's death. A beneficiary's interest is simply not acceptable by creditors except in the most extreme cases, such as unpaid child support or if the beneficiary commits a violent crime, etc.
So, sometimes you may hear "revocable trusts provide no asset protection" -- now you know that is only half-true.
TD Bank, N.A. v. Pearl, ___ F.Supp.2d ____, 2012 WL 4101946 (D.D.C., Sept. 19, 2012).http://goo.gl/DtA9m
This article at http://onforb.es/QQMKqX and http://goo.gl/yXhUL
