Since the concept of currency and debt was created, debtors have been playing a cat-and-mouse game with creditors in order to avoid satisfaction of their debts. A ruling last week by the Massachusetts Appeals Court in Citizens Bank v. Coleman (May 15, 2013) is notable because it put the kibosh on a formerly popular estate planning practice in Massachusetts where a husband conveys property into a real estate nominee trust held by his wife. The problem, of course, was that the husband was being chased by a creditor holding a $600,000+ judgment, so any action he took with his assets would ultimately come under the judicial microscope. And that’s exactly what happened in this case, as the Court unwound the transfer and ruled in the bank’s favor.
Old Debts Come Back to Haunt Developer
In the 1980’s, Martin Coleman, a real estate developer, purchased two multifamily rental properties in Waltham. Coleman furnished all the cash to acquire these properties. In 1986, Coleman married his wife, Pamela, who began managing the properties. She dealt with all issues relating to the tenants (including rent collection and filling vacancies) and superintended the maintenance, repairs, and payment of bills. In 1988, Coleman defaulted on a $6.2 million construction loan, which he had personally guaranteed.
In 1989, Coleman transferred, for $1.00, title to both rental properties into two real estate nominee trusts, with Pamela named as the sole beneficiary of each trust. Pamela continued to assist with the management of the properties, but Martin paid for all the property expenses.
In 1994, Federal Savings Bank obtained a $600,000 plus judgment against Mr. Coleman which was subsequently acquired by Citizens Bank. Citizens sued the Colemans, attempting to “reach and apply” Pamela’s interest in the two Waltham properties to satisfy the large judgment.
Interfamily Conveyance = Resulting Trust = Creditor Wins
The Appeals Court ultimately ruled that Mr. Coleman’s conveyance into the nominee trusts was a “resulting trust” — essentially a fraudulent transfer to avoid satisfaction of the large judgment. With respect to transfers between husband and wife, the law presumes they are not designed to avoid creditors. This presumption, however, can be overcome through evidence that the conveyance did not result in any change in behavior or financial responsibilities between husband and wife, as compared to before the transfer. In this case, the evidence showed that Mr. Coleman still held himself out as the owner of the rental properties, nothing changed as to the wife’s property management duties, and the conveyance was not truly part of a legitimate estate plan, as the Colemans contended. The Court ruled that Citizens Bank will be able to sell the two Waltham properties at auction to satisfy the judgment which is likely now seven figures.
Moral Of The Story: Trash the Nominee Trust
Real estate nominee trusts were all the rage in the 1980’s and into the 1990’s. A series of court rulings, however, exposed serious flaws with the asset protection security these trusts were supposed to provide. They are now out of favor, yet, they are still being used. Perhaps this case will put the proverbial nail in the nominee trust coffin. Memo to estate planners: They don’t work, so stop using them. Go with a limited liability company instead.
Richard D. Vetstein is a Massachusetts real estate attorney who is frequently consulted by property owners looking to shelter their assets. Please contact him at firstname.lastname@example.org or 508-620-5352.