Minnesota Stat. Section 502.76 - Rights of creditors to assets within a revocable trust.

As an attorney often representing banks and other creditors, I have always considered one of the many established principles of common and statutory law in Minnesota to be that assets titled in the name of a revocable trust are directly accessible as the assets of the grantor of that trust.  I was surprised to find in a recent receivership action for a bank client that this principle was not so readily accepted by the trial court in the face of counter-arguments asserted by the grantor-debtor’s attorney.  Like many hornbook principles of law, no case law was available on the issue, and it proved necessary to reach back and present the court with an evolution within the Uniform Restatement of Trusts in order to reaffirm this principle and bring proper perspective to a somewhat obscure statute buried within the Minnesota Statutes under Chapter 502 entitled “Powers of Appointment.”

The applicable statute is Section 502.76, which on its face appears to be unambiguous in its statement of this basic legal principle:

502.76 POWER OF REVOCATION.

When the grantor in a conveyance personally reserves, for the grantor’s own benefit, an absolute power of revocation, such grantor is still the absolute owner of the estate conveyed, so far as the rights of creditors and purchasers are concerned.

Although I cited Section 502.76 to the trial court as clear evidence of my creditor-client’s entitlement to reach the assets of the debtor’s revocable trust, opposing counsel refused to concede the point, asserting that Section 502.76 was contained within a Chapter that applied only to general powers of appointment of a trustee, and therefore did not pertain to a power within a revocable trust to revoke the trust itself.  In other words, argued the debtor, the words “absolute power of revocation” within Section 502.76 should be interpreted to refer to only a reservation of the general power of appointment within a trust document, and had nothing to do with the power of revocation of the trust itself.  The debtor further argued that my creditor-client, in order for the trust assets to be reachable, was required to first prove fraud as the basis for the transfer of the assets into the Revocable Trust.

The trial court hesitated based on these contentions, and called for supporting legal authority for the application of Section 502.76 as I had requested.  Although it was an unexpected protracted process, I was able to establish to the trial court’s satisfaction that Section 502.76 was a codification of common law, reaching back to excerpts from the Uniform Restatement of Trusts to confirm its applicability.

From the research on this issue, I was able to present to the trial court the specific discussion and reference to Section 502.76 found in Section 330 of the Restatement (Second) of Trust, published in 1959, which actually treated Section 502.76 as an exception to a contrary general principle that assets of a Revocable Trust could be seized upon by a creditor only after the grantor had first taken action to actually revoke the trust.  This general principle was articulated in the Restatement as follows:

  1. Power of settlor’s creditors where settlor has power of revocation.Unless it is otherwise provided by statute a power of revocation reserved by the settlor cannot be reached by his creditors. If he revokes the trust and recovers the trust property, the creditors can reach the property; but they cannot compel him to revoke the trust for their benefit.

Despite this contrary interpretation, the Reporter Comments to this Sub-Section “o” specifically cited to Minn. Stat. § 502.76 as one of several state statutes that did in fact give creditors direct access to property held in a revocable trust, without waiting for the trust to be first revoked by the grantor:

Comment o. Power of settlor’s creditors where settlor has power of revocationIn the absence of a statute, it is held that creditors of the settlor cannot reach the trust property merely because he has reserved a power of revocation. [citations omitted]  In several States there are statutes under which creditors of the settlor of a revocable trust can reach the trust estate. * * * Minn.Stat.Ann. § 502.76; * * *.

 I was further able to present to the trial court the fact that the Restatement came full circle 44 years later, reversing its position and stating a general rule applying the same principles of Minnesota’s Statute Section 502.76.  Published in 2003, Section 25, Vol.1 of the Restatement (Third) of Trust and its comments holds that “property held in the [revocable] trust is subject to the claims of creditors of the settlor or of the deceased settlor’s estate if the same property belonging to the settlor or the estate would be subject to the claims of the creditors, taking account of homestead rights and other exemptions.”  The comments to this principle went further to clearly acknowledge that the newly adopted positions “differ fundamentally from the positions taken in prior Restatements of Trusts,” and then proceed to reject the very arguments presented by the debtor in my case that the trust and/or the asset transfers had to first be shown to be fraudulent:

  1. Rights of creditors and other matters. Although a revocable trust is nontestamentary and is therefore not subject to the Wills Act or to the usual procedures of estate administration, property held in the trust is subject to the claims of creditors of the settlor or of the deceased settlor’s estate if the same property belonging to the settlor or the estate would be subject to the claims of the creditors, taking account of homestead rights and other exemptions. This result is not dependent on the trust being “illusory” or “testamentary,” or on the transfer being a fraudulent conveyance, but is based on the sound public policy of basing the rights of creditors on the substance rather than the form of the debtor’s property rights. Nor is the result affected by the presence of a spendthrift provision in the terms of the trust (see § 58(2)) or by whether a creditor’s claim arose before or after the transfer.

Upon receipt this research, the trial court wholeheartedly adopted my position to apply Minn. Stat. § 502.76 as granting my creditor-client direct access to the grantor’s assets, and outright rejected the debtor’s arguments. In setting forth its conclusions of law granting my requested receivership, the Minnesota trial court held:

“Since Defendant’s Revocable Trust is entirely revocable at the sole discretion of Defendant as grantor, the assets of the Revocable Trust are considered to be owned by Defendant as to the rights of Plaintiff, as creditor, are concerned. Minn. Stat. § 502.76(2012). This conforms to common law, under which for purposes of the rights of creditors, property held in a revocable trust “is subject to the claims of creditors of the [trust] settlor.” Restatement (Third) of Trust § 25, cmt. e (2001). And under the terms of the Revocable Trust, Plaintiff may access the assets under Minn. Stat. § 575.05 (2012) because the Revocable Trust by its own terms gives Defendant the right to access all of the trust’s assets and to direct payment of all trust income.

 * * *

“Defendant argued at the first hearing that Minn. Stat. § 502.76 is limited to the reserved power to revoke a general appointment. This argument is without merit. Under the language of section 502.76, Defendant is a grantor, the revocable trust is a conveyance, and because the grantor has, for his own benefit, reserved an absolute power of revocation over the trust instrument, Defendant is still the absolute owner of the trust assets “so far as the rights of creditors and purchasers are concerned.” Minn. Stat. § 502.76.

* * *

“Further supporting the court’s conclusion is the Restatement (Second) of Trust, which has interpreted Minn. Stat. § 502.76 to permit creditors of the grantor of a revocable trust to reach the trust estate. See Restatement (Second) of Trust § 330, cmt. e, Reporter’s Notes (1959) (citing section 502.76 to include Minnesota among several states in which “there are statutes under which creditors of the settlor of a revocable trust can reach the trust estate”).”

Minnesota Statutes Section 502.76, codifying Minnesota common law, can therefore be relied upon to directly defeat efforts of a debtor to use a revocable trust to avoid creditors, and creditors can directly seize assets of the revocable trust as if they are assets of that debtor.  Thanks to this compelled analysis, I was able to use Section 502.76 successfully to obtain my requested receivership and the right to seize control over the debtor’s substantial assets transferred over to a revocable trust as a means of avoiding my creditor-client’s money judgment.

- Steve Hetland

Leighton Hetland PLLP

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