Response to “The Two-Word Clause that Could Prevent Jeffrey Epstein’s Alleged Victims from Receiving Financial Justice”
In his blog post, The Two-Word Clause That Could Prevent Jeffrey Epstein’s Alleged Victims from Receiving Financial Justice, Professor Kent Schenkel discusses Jeffrey Epstein’s last-ditch attempt to shield his $500 million estate from the claims of his accusers by devising his assets to a testamentary trust. Professor Schenkel goes on to explore the injustices posed by the law of trusts when wrongdoers can protect their assets from recovery by their victims.
Trust law is a fantastically old area of law, rife with legal fictions and made-up doctrines. Modern Anglo-American trust law developed from feudalist England, where trusts (then called ‘uses’) primarily served to bypass the rules of primogeniture and to elude tax obligations to the Crown.1 Trusts are amorphous legal entities bound by rules concocted during the Crusades that we have all just decided to go along with. The spendthrift trust is one of the many doctrines in trust law that has stood the test of time—perhaps because people keep having children and grandchildren they do not trust to manage their money.
Professor Schenkel’s teaches a Wills, Trusts & Estates course here at New England Law | Boston, where he refers to the language required to create a spendthrift trust as “magic dust” that gets sprinkled over an irrevocable trust, thus forming a mystical forcefield around the trust assets, shielding them from creditors. To bestow such substantial protection upon the trust assets, this language must be complex and steeped in legal gravitas, correct? No. The magical language required to create a spendthrift trust is simply a clause prohibiting (1) the beneficiary from assigning away her beneficial interest, and (2) creditors from attaching to the beneficiary’s interest in the trust.2 A spendthrift clause is the abracadabra of trust law: utter these magic words, and your money disappears from creditors’ reach.
Historically, the general rule has been that adding a spendthrift clause to a self-settled trust (a trust where the settlor is also the beneficiary) will not protect the settlor-beneficiary’s assets from creditors. This seems common sense: an individual shouldn’t be able to lock up their assets in a self-settled trust to duck their creditors. However, since the late 1990s, several states have enacted statutes legitimizing this practice. A Domestic Asset Protection Trust (“DAPT”) shields self-settled trust assets from creditors so long as the DAPT is irrevocable and includes that magic spendthrift language. The conditions and restrictions on DAPT protection vary among the growing number of states that have recognized them. Many states provide exceptions for specific types of creditors, such as alimony or child support creditors. Some states, like Nevada, are more aggressive and protect the assets from all classes of creditors.
The rise of self-settled spendthrift trusts presents serious public policy concerns and threatens to erode existing debtor-creditor law. Widespread usage of DAPTs could seriously weaken the plaintiffs’ bar if more states enact ironclad protections like Nevada’s.3 A defendant locking up his assets and throwing away the key, beyond the reach of even involuntary creditors, is undoubtedly an attractive concept to tort reform states. On a practical level, the effect of DAPT recognition is a tale as old as time: the rich get richer, and those without access to trust and estate planners to sprinkle in that magic dust are stuck paying the Crown.
1Robert H. Sitkoff & Jesse Dukeminier, Wills, Trusts, and Estates at 396–97 (11th ed. 2022).
2Id.
3See Nev. Rev. Stat. Ann. § 166.040 (2023); Jeffrey P. Luszeck & Brian K. Steadman, Five Things About Nevada Domestic Asset Protection Trusts, Clark Cnty Bar Ass’n (Dec. 29, 2020), https://perma.cc/NHG9-MYGU.
