By: Edward D. Brown, Esq. and Eric R. Kaplan, Esq.
In In re Kittrell,[1] a complaint was filed by the Chapter 7 bankruptcy trustee (“Plaintiff”) against debtors Murphy R. Kittrell, Jr. and Barbara C. Kittrell (the “Kittrells”) and the Kittrell Children’s Trust (the “Trust”), which gratuitously received assets from the Kittrells in 2014. Plaintiff’s complaint sought to establish that: (a) the Trust’s assets were fraudulently transferred to the Trust, rendering the value of such assets recoverable for the benefit of the Kittrells’ bankruptcy estate pursuant to 11 U.S.C. § 548(e) (the ten year avoidance remedy statute discussed below); and (b) the Trust’s assets were property of the bankruptcy estate under 11 U.S.C. § 541, rendering the value of such assets recoverable for the benefit of the bankruptcy estate under 11 U.S.C. § 542(a).
With respect to Plaintiff’s second theory of recovery above (that the Trust’s assets were property of the bankruptcy estate pursuant to 11 U.S.C. § 541 and recoverable under 11 U.S.C. § 542(a)), the United States Bankruptcy Court for the District of Arizona (the “Court”) indicated that the Trust’s assets were, in fact, assets of the Kittrells’ bankruptcy estate if the Kittrells either: (i) held an equitable interest in the Trust and its assets; or (ii) if the Kittrells had the ability to exercise powers over such assets for their own personal benefit.
By way of background, on February 25, 2022, the Kittrells filed a voluntary bankruptcy petition. The estimated allowed claims totaled between $4 million and $6.5 million. Other than a small amount of cash, the Kittrells did not schedule any assets for the benefit of their creditors. At issue, however, were the assets owned by the Trust. The Kittrells argued that the Trust was an irrevocable trust for their children’s benefit, and therefore, not available to the creditors of their bankruptcy estate.
The Kittrells (also referred to herein as the “Settlors” or each, individually, as a “Settlor”) created the Trust in October 2014 pursuant to the laws of the State of Arizona. The Kittrells were the Trust’s settlors and trustees. The Trust’s initial beneficiaries included the Kittrells’ children.
At the time of the transfer of assets to the Trust, there was litigation pending against the Kittrells. The Kittrells also had a total exceeding $1.5 million in outstanding judgments against them. Such judgments were not satisfied when the Kittrells transferred assets into the Trust.
The Trust contained an irrevocability provision providing that the Trust was to remain an irrevocable trust and the settlors (the Kittrells) retained no right to alter, amend, revoke, or terminate the Trust. Other than that, the Court proceeded to mention numerous facts leading it to conclude the Trust’s assets were not protected; so many facts that it is hard to know for sure which factors were fatal to the protection of assets, and which were more in the nature of more added justifications for the Court to support its ruling, and whether any one of such added justifications alone, in the Court’s mind, could have independently justified piercing the Trust.
Let’s start with what may have been the most relevant factors needed to topple the Trust, followed by what may be perceived by some as more “icing on the cake” to remove all doubt whether the Court drew the correct conclusion.
The factors that may have carried the greatest weight are as follows:
- Too much control. For starters, the Settlors also served as trustees, which allowed them to retain control over the trust assets. This is a strong indication that the Settlors may not have sufficiently parted ways with the assets placed into the Trust.
- Fraudulent Transfers/Voidable Transactions. The Settlors placed assets (“funded”) into the Trust at a time that they had substantial creditor problems, leaving themselves insolvent once the assets were technically no longer their assets (i.e., the Trust now being the legal owner of such assets instead). That is a classic “fraudulent transfer” (also known as a “voidable transaction”) which alone, even if all other factors are ignored, provides creditors rights to claw back such assets to satisfy outstanding debts.
a. Another relevant fact is that the Settlors then filed for bankruptcy, which opened up the door to additional arrows in the quiver available to creditors to allow any transferred assets to be subject to such creditors’ claims. In general, for purposes of this discussion, any transfers made (with the actual intent to hinder, delay or defraud creditors) to anything similar to a trust in which a settlor retains a beneficial interest, must season for ten years before such transfers are considered to be beyond the reach of the avoidance of such transfers for the creditors’ benefit, as allowed under 11 U.S.C. Section 548(e) of the Bankruptcy Code.
i. Specifically, the Court indicated that to avoid the Kittrells’ transfers pursuant to 11 U.S.C. § 548(e), Plaintiff must establish, by a preponderance of the evidence, that: (a) the Trust was a self-settled trust or similar device; (b) the Kittrells were beneficiaries of the Trust; and (c) the Kittrells transferred their ownership interest in the Trust with the intent to hinder, delay, or defraud creditors.
ii. In analyzing whether the Trust was a “self-settled trust or similar device,” the Court looked at the Trust’s terms and provisions. The Court noted the beneficiary/son retained a limited power of appointment to either add or remove the Kittrells as beneficiaries as well as the power for the son to revoke the Trust and distribute the assets to the Kittrells. As a result of the son’s retained powers, the Court indicated that “the Kittrells are clearly contingent beneficiaries of the [Trust].”[2] In addition to the Kittrells being deemed as contingent beneficiaries of the Trust, the Court noted that “the record reflects that the Kittrells hold vested beneficial interests in the [Trust]. Although the Kittrells are not currently named beneficiaries, [Mr. Kittrell] has held himself out as an owner of the [Trust’s] assets, and the Kittrells have claimed income and losses on their personal tax returns for a business owned by the [Trust], obtained loans by pledging [Trust] assets as collateral, and paid off millions of dollars of personal obligations using [Trust] assets.”[3] As such, the Court determined that the Kittrells were Trust beneficiaries within the meaning of 11 U.S.C. § 548(e)(1)(C). As the Kittrells were also the Trust’s settlors, the Trust was found to be a “self-settled” trust, which satisfied the requirements of 11 U.S.C. § 548(e)(1)(A).
iii. In its analysis as to whether the Kittrells acted with the actual intent to hinder, delay, or defraud creditors, the Court pointed out that: [a]t the time of the transfer of the [assets], the Kittrells had two outstanding judgments against them and were defendants in a lawsuit pertaining to an unpaid loan. As of the [date the bankruptcy petition was filed], portions of those existing judgments and the judgment that resulted from the litigation pending on the date the Trust was created remained outstanding. As a result of such transfers, the Kittrells were “left with no material assets, other than their encumbered home and vehicles, to satisfy the claims of creditors.”[4] The Court further opined that the Kittrells received numerous benefits from the Trust and had effectively retained control over all interests transferred to the Trust. Further, and even more damning to the Kittrells’ case, the Court stated:
In this case, although the Kittrells testified that they formed the [Trust] and transferred their [assets] into the [Trust] as a legitimate estate planning tool, the Kittrells have admitted that they formed the Trust and transferred their [assets] to the Trust, at least in part, to hinder and evade certain creditors and protect their assets. Further, the Kittrells’ testimony and actions, and the totality of the circumstances surrounding . . . . . . . the transfer of the [assets] into the [Trust on the date the Trust was created] reflect that the Kittrells’ primary intent was to shield valuable assets from their creditors.[5]
- Alter Ego. The Court mentioned that the Settlors’ son also had the power to amend the Trust and in fact did so to authorize the son to direct the trustees to transfer the trust assets to another trust created by a Settlor without restriction. The Court further stated that the son executed such an amendment “at the direction of the” Settlors. This implies that the Court was factoring in that the son was acting as an agent or nominee for, or as an alter ego of, the Settlors, which such a scenario does support a finding that a trust could be considered a sham and therefore of no protective effect.
- De facto Self-Settled Trust/Sham Trust. Moreover, Mr. Kittrell acted in the following ways: (a) used Trust assets to guarantee, serve as collateral for, and pay off his personal financial obligations; (b) held himself out as the sole owner of assets owned by the Trust; and (c) individually transferred ownership interests in Trust assets to third parties. All valid points, as this shows a Settlor, although serving as a trustee, using Trust assets for his own personal gain (and therefore supporting the view that the Trust was self-settled) and demonstrating that he viewed the Trust assets as his own personal property. Other cases with similar facts have also held trusts as ineffective, using references to such trusts as being a sham, illusory, invalid, an alter ego of the Settlor or as an agent for the Settlor.
It appears that the above factors are enough to support the Court’s decision.
We now turn to the icing on the cake discussions that might leave some wondering if any one of the below items would have warranted the same result.
- The Settlor’s son, who was a Trust beneficiary, held a non-fiduciary power (and therefore he had no duty or obligation to act in any particular person’s best interest) to appoint Trust assets to a number of “appointees,” including the Settlors. The Court determined that this made the Trust a “self-settled” trust because this meant the Settlors were contingent beneficiaries, citing the Arizona Trust Code, which states “[b]eneficiary, as it relates to a trust beneficiary, includes a person who has any present or future interest, vested or contingent, and includes the owner of an interest by assignment or other transfer”.[6]
a. There was no discussion of the fact that typically, if a beneficiary has a power to appoint assets to others, this is generally viewed as a power held by an “adverse party,” who may be diluting his own beneficial interest in a trust by removing assets out of the trust. It is akin to an individual making a gratuitous transfer to another. In both cases, the Settlor would have no legal basis for claiming the right to receive the subject assets. And yet, the Court concluded that what some might term as a “mere expectancy” rises to the level of being a beneficial interest in a trust. It makes one wonder if all the other bad facts of Kittrell led to such a liberal interpretation of who is a beneficiary. Query how slippery a slope can follow the view that if there is any way, somehow, someday, a settlor of a trust could ever conceivably receive any assets, directly or indirectly, from a trust that he/she created under any possible scenario, it becomes a self-settled trust.
2. The Trust agreement granted the Settlors’ son a limited power of appointment (which is a non-fiduciary power) in ways by which he could also amend and/or revoke the Trust. The Settlors’ son also had a limited power to add beneficiaries to the Trust (including, but not limited to, the Kittrells) and remove beneficiaries from the Trust. This power to add beneficiaries added to the “contingencies” that the Court noted. Does this mean that trusts that have a “protector” or similar powerholders who have such authority to cause such trusts to be self-settled (absent some proviso that such powers cannot be exercised in any way that could benefit a settlor)?
3. Further, the Trust contained provisions whereby the Kittrells were permitted to “hold and/or register assets of the Trust in their personal names without disclosing the trust relationship, sell to and purchase property from the Trust, and lend to or borrow money from the [Trust].”[7] More facts would have been interesting to know, such as: (a) to the extent the Kittrells could hold assets in their own names, was this purely for certain administrative conveniences that would allow them to act only in the best interest of the beneficiaries of the Trust as opposed to for their own personal benefit? and (b) if the Kittrells borrowed money from the Trust, was it only allowed under the condition that such transaction be pursuant to arm’s length terms that would mandate that an adequate interest rate be paid, that sufficient collateral be provided, and include such other loan terms that unrelated parties would have included? These distinctions would seem to be highly relevant in order to better establish whether such powers were actually indicative that the trust was self-settled.
4. The Kittrells testified that: (a) no distributions were ever made to the Trust’s beneficiaries; (b) they did not divide the Trust into separate shares for each named living beneficiary in 2020 as required by the trust agreement; (c) the Trust had no separate bank accounts, books or records; and (d) the Trust never filed its own tax returns. In fact, over a three-year period, the Kittrells claimed Trust income and more than $10 million in losses on their personal tax returns. These are all curious considering, respectively, whether: (a) did the trustees document valid reasons for not making any distributions (justifiable and permitted reasons to withhold or delay distributions)?; (b) was the failure to divide the trust an inadvertent error or perhaps a breach of a fiduciary duty, but short of an entire disregard of the Trust’s existence or an event that causes the Trust to be self-settled?; (c) are separate bank accounts necessary if all the Trust owns are underlying LLC interests, directly or indirectly, and what does Arizona law say about the effect of a failure to maintain separate books and records (does that make a trust self-settled)?; and (d) what of the fact that many grantor trusts do not file separate tax returns in accordance with the Treasury Regulations, and the fact that grantor trusts typically pass all their income and losses through to the settlors on their personal income tax returns? This is not to suggest that these are not all valid points to mention in the Court opinion, but further explanations as to their direct bearing on the outcome would have been interesting. It seems that all these “bad facts” that added a stronger perception by the Court that the Settlors did not respect the “formalities” of a trust arrangement, and therefore why should the Court.
5. The Court also mentioned that Mr. Kittrell could substitute assets of equal value in exchange for trust assets. The Court factored that fact into its final decision, since it demonstrated an additional way that Mr. Kittrell could obtain ownership of the assets in the Trust. This power alone should not be a basis for causing a trust to be self-settled in light of the fact that many estate planning irrevocable trusts contain a similar provision in order to gain grantor trust status. Otherwise, such substitution power would mean that all those irrevocable “intentionally defective” grantor trusts, as to how they are frequently referred, could be ineffective.
Bottom line, as stated above, the Kittrells were deemed to be Trust beneficiaries. The Court also referenced the fact that Mr. Kittrell held himself out as the sole member of limited liability companies owned by the Trust, signed tax returns reporting to be the owner of Trust assets and transferred assets in his individual capacity for his personal benefit. Further, the Court noted that the Kittrells claimed millions of dollars in business losses related to the entities purportedly owned by the Trust on their personal tax returns. The record reflected that the Kittrells retained absolute control over Trust assets, managed such assets for their personal benefit and were, in effect, the settlors, trustees and beneficiaries of the Trust. As such the Court held that the Trust assets were property of the Kittrells’ bankruptcy estate. The Court held that Plaintiff was entitled to a judgment in an amount of no less than $15 million.
[1] 2026 WL 2151539 (Bk.D.Az., July 24, 2026).
[2] Id. at *8.
[3] Id.
[4] Id. at *9.
[5] Id. As a result, the Court held that the Plaintiff sufficiently established that such transfers could be avoided pursuant to 11 U.S.C. § 548(e)(1). In essence, there were “admissions against interest” made that the transfers to the Trust were indeed motivated with the intent to avoid creditors.
[6] A.R.S. Section 14-1201(4). Also, see Wilmington Capital LLC v. The Big Whale Trust (Case No. 12CS1113, Superior Court for Los Angeles County, California), which in a marketing piece located by the authors, stated that such case stands for the proposition of an appointee on a power of appointment not being a beneficiary. Further, in another article located by the authors, the conclusion was that a mere eligible appointee on a power of appointment is not a beneficiary of a trust. It appears that there may be differences of opinion with regard to the Court’s position, especially in light of the powerholder owing no fiduciary obligations to the appointee, coupled with the fact that the appointee has no enforceable right to compel the exercise of such power for the appointee’s benefit.
[7] Id. at *4.
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