Estate, Powers and Trusts, § 7-1.8: Duration of Trust for Benefit of Creditors

While many people think of a trust as being created in order to transfer family, friends or organizations assets, there are a number of reasons that a trust can be created. One reason is to ensure that debts are paid to someone’s creditors. This means that someone who is deep in debt, referred to as the debtor or assignor, can voluntarily agree to transfer all of some of his or her assets to someone else. That person, referred to as the assignee or trustee, will then liquidate those assets and use the proceeds to pay the debtor’s creditors. The law puts a time limitation on such an assignment in cases where the property is real property or real estate. Under New York Estate, Powers and Trust, section 7-1.8, unless the real property is liquidated and the proceeds used to pay creditors, the assignment of real property expires at 10 years. At that time the real property reverts back the assignor. It is important to distinguish the creation of a trust to benefit creditors from an assignment to defraud creditors. If an assignment or property is made to place that property beyond the reach of creditors, the assignment is a fraudulent conveyance and is prohibited by law. To learn more about the how estate planning can be an effective way not only to leave property to those you care about, but also to protect your assets from creditors, contact an experienced New York Trust Lawyer.

1. Interest remaining in the creator of a trust: Estates, Powers and Trust, section 7-1.7
2. Revocation of trusts: Estates, Powers and Trust, section 7-1.9

If a person is in debt, he or she may choose to voluntarily transfer property to a trust with another person named as trustee. The trust will then hold property that will be used to pay the creditor. Thus, the debtor would be the assignor and the person who takes legal title to the property is the assignee. The assignee is also the trustee. The trust document would enumerate the terms of the assignment. For example, the trust may give the trustee to liquidate the debtor’s assets and turn the proceeds to the debtor’s creditors. The document would also state the duration of the trust.

When it comes to a trust that is created for the benefit of creditors, practically any type of property can be assigned, not just cash. For example, real estate, jewelry, vehicles, and securities could be turned over by the debtor to the trustee. However, if real estate is transferred to the trust, under EPTL 7-1.8 that assignment expires 10 years after the trust was created. The exception to this general rule is where the trust document specifies at different time limitation. When that time period expires, the real property reverts back to the debtor who was the assignor. Of course if such real estate was sold prior to the expiration of the limitation period, the law allows the proceeds to be used to pay the creditors.

Duration of trust for benefit of creditors (a) Where an estate in real property has heretofore vested or shall hereafter vest in an assignee or other trustee for the benefit of creditors, it shall cease at the expiration of ten years from the time the trust was created, except where a different limitation is contained in the instrument creating the trust or is otherwise prescribed by law. Such estate shall thereupon revert to the assignor. (b) This section does not apply to a trust of personal property or to a trust of real property created in connection with the salvaging of mortgage participation certificates. Nor does this section affect any rights to the proceeds of a sale of real property made by the assignee or other trustee for the benefit of creditors.

To learn more about probate, wills, trusts and other estate planning documents, contact Stephen Bilkis and Associates. We will help create a trust for you that is consistent with your specific goals. Contact us at 800.696.9529 to schedule a free, no obligation consultation regarding your estate issue. We serve individuals throughout the following locations: