USING THE ALTER EGO DOCTRINE TO PIERCE THE TRUST VEIL AND DISCOURAGE WRONGFUL ACTIVITY Written by: Max John
Courts that are considering the liability of settlor- beneficiaries of a Domestic Asset Protection Trust (DAPT), should adopt the alter ego theory to hold these individuals financially accountable for their intentional wrongdoings, and explores the policy soundness behind this theory. When assets are transferred to a self- settled trust, savvy wrongdoers may be able to legally protect their assets if they do not have any creditors at or near the time of transfer. With self-settled trusts, the wrongdoer can still benefit from the trust assets even though the assets are technically property of the trust and no longer owned by the wrongdoer.
An emerging self-settled irrevocable trust is the Domestic Asset Protection Trust which was originally established in the late 1990s. In the years since, and as more people continue to take proactive steps to safeguard their assets from liabilities, additional states have adopted this type of trust or its equivalent. While there are legitimate planning purposes behind the establishment of an asset protection trust, there is also great potential for abuse with this type of trust. As more states adopt this emerging form of trust, courts should be prepared to hold intentional wrongdoers financially accountable for their actions. However, current legislation limits the ways a settlor can be held financially accountable once the assets are in trust. This Comment will demonstrate how this type of trust can be abused, why the alter ego doctrine is a viable common law method to limit settlor abuse and recommend a set of factors for when the alter ego doctrine should apply.
