Spendthrift Trusts: How Safe are Trusts At Protecting Assets?

In a case called Kokoszka v. James Samatas Discretionary Trust (In re Samatas) a trust was set up for a child who was named trustee aned beneficiary. The child served as co-trustee, investment trustee so he had substantial control over the trust, but the actual administration of the trust was mishandled. The Court felt that the independent co-trustee who served with the son did not carry out his responsibilities as a co-trustee leaving the son/beneficiary/trustee as the sole functional trustee. The Court also found that the child/beneficiary/trustee used the trust as his own personal piggy bank. Trust formalities were ignored. Although the trust was created by a third party (not by the beneficiary) and was a discretionary spendthrift trust its assets could be reached by creditors because the trust was effectively the alter ego of the son/debtor. As a result of all of this trust assets could be reached by the bankruptcy estate because of his control over the trust. The Court pierced the trust.