EPTL 7-3.1: When a Self-Settled Trust Will Not Protect Assets from New York Creditors

Many people assume that moving assets into an irrevocable trust places those assets beyond the reach of future creditors. Under New York law, that assumption fails when the person who funds the trust is also a beneficiary. Section 7-3.1 of the Estates, Powers and Trusts Law (EPTL) sets out the rule. A trust you create for your own benefit does not shield your property from your creditors, whether those creditors existed when you signed the trust or appeared years later.

This page explains what EPTL 7-3.1 says, how New York courts apply it, how it interacts with the Civil Practice Law and Rules (CPLR) and the Debtor and Creditor Law, and what creditors and trust creators should expect in practice.

The Rule in Plain Language

A self-settled trust is a trust in which the creator (also called the grantor or settlor) is also a beneficiary. EPTL 7-3.1(a) provides that "a disposition in trust for the use of the creator is void as against the existing or subsequent creditors of the creator."

In practical terms:

• The trust is still valid for other purposes: The statute makes the transfer void only "as against" creditors. Between the creator, the trustee, and the other beneficiaries, the trust continues to operate.
• Both existing and future creditors are covered: A creditor does not need to show that the debt existed when the trust was funded. A creditor whose claim arose ten years later can still rely on EPTL 7-3.1.
• No proof of bad intent is required: Unlike a fraudulent transfer claim, a creditor relying on EPTL 7-3.1 does not have to prove that the creator meant to hinder or defraud anyone. The creator's beneficial interest is enough.
• Spendthrift language does not help the creator: A clause barring a beneficiary from assigning an interest, or barring creditors from reaching it, does not protect the creator's own interest in a trust the creator funded.

New York law does not authorize a self-settled asset protection trust. If you are the creator and a permitted beneficiary of your own trust, you should assume that your creditors can reach whatever the trustee could pay to you.

What the Statute Means in Practice

How Much a Creditor Can Reach

The amount a creditor can reach depends on the size of the creator's retained interest. New York courts measure that interest by what the trustee is permitted to distribute to the creator, not by what the trustee has actually distributed or intends to distribute.

• Fully discretionary interest: If the trustee may pay income and principal to the creator in the trustee's discretion, creditors can generally reach the entire trust, up to the amount of the debt. The Appellate Division reached this result in Vanderbilt Credit Corp. v. Chase Manhattan Bank, 100 A.D.2d 544 (2d Dep't 1984), holding that a trustee's discretion to pay principal to the creator allowed the creator's creditor to reach the trust principal.
• Income-only interest: If the creator retained only the right to income, with principal passing to others, creditors can reach the income stream. The principal itself is not reachable under EPTL 7-3.1, although it may be vulnerable under fraudulent transfer law.
• Limited principal interest: If the trustee may distribute principal to the creator only up to a fixed amount or percentage, the creditor's reach is generally limited to that portion.

Spendthrift Clauses and the Court of Appeals

New York's highest court addressed self-settled spendthrift arrangements in Matter of Granwell, 20 N.Y.2d 91 (1967). The court held that a person cannot place property in trust for his own benefit and then use a restraint on alienation to keep that interest from his creditors. Spendthrift protection in New York exists to carry out the wishes of a third party who gives property to a beneficiary. It does not let a person insulate his own assets while keeping the benefit of them.

Trusts That Are Not Self-Settled

The contrast with third-party trusts explains the rule. When a parent, grandparent, or other person creates a trust for a beneficiary, New York law gives that beneficiary's interest substantial protection:

• EPTL 7-1.5: The income interest of a beneficiary in an express trust is inalienable unless the trust instrument provides otherwise.
• CPLR 5205(c)(1): Property held in trust for a judgment debtor is exempt from enforcement where the trust was created by, or the funds came from, a person other than the judgment debtor.
• CPLR 5205(d)(1): Ninety percent of the income from such a third-party trust is exempt, except where the court finds that part of it is unnecessary for the reasonable requirements of the debtor and the debtor's dependents.

Each of these protections depends on the trust being funded by someone other than the debtor. Once the debtor is the source of the property, these exemptions fall away and EPTL 7-3.1 controls.

Income Tax Reimbursement Clauses

Many irrevocable trusts are drafted as grantor trusts for income tax purposes, so the creator pays income tax on trust earnings he or she does not receive. Trust instruments often let the trustee reimburse the creator for that tax. EPTL 7-3.1 was amended to provide that a trustee's discretionary power to pay or reimburse the creator for income tax attributable to trust income does not, by itself, make the trust a disposition for the use of the creator. Without that amendment, a reimbursement clause could have exposed an otherwise protected trust. The amendment applies only to that tax payment power. Any other retained benefit is analyzed under the general rule.

Revocable Trusts

A revocable trust provides no creditor protection during the creator's life. The creator can take the property back at will, and EPTL 10-10.6 treats a person who reserves an unqualified power of revocation as the owner of the property for purposes of creditors. Revocable trusts serve legitimate goals, such as avoiding probate and planning for incapacity, but creditor protection is not one of them.

Worked Examples

The following examples use round numbers to show how the rule operates. They assume no exemption or defense applies beyond those stated.

Example 1: Fully Discretionary Self-Settled Trust

Maria transfers $800,000 in brokerage accounts to an irrevocable trust. Her brother is trustee. The trust allows him to distribute income and principal to Maria "in his sole and absolute discretion," with the remainder to her children at her death. The trust contains a spendthrift clause. Four years later, a creditor obtains a $350,000 money judgment against Maria arising from a business guaranty she signed after the trust was funded.

Because the trustee may pay the entire trust to Maria, her creditor can reach trust assets up to the full $350,000 judgment, plus statutory interest. The spendthrift clause does not change the result, and the creditor does not need to prove that Maria intended to avoid creditors when she funded the trust.

Example 2: Retained Income Interest

David places $1,000,000 in an irrevocable trust. He keeps the right to all income for life, and the trustee has no power to distribute principal to him. The trust earns about $40,000 a year. A creditor holds a $200,000 judgment.

The creditor can reach David's income interest, approximately $40,000 a year, through enforcement devices under CPLR Article 52. The $1,000,000 principal, which is held for the remainder beneficiaries, is not reachable under EPTL 7-3.1. The creditor may still attack the original transfer of principal if it qualifies as a voidable transaction under the Debtor and Creditor Law.

Example 3: Third-Party Trust for the Same Person

David's mother creates a separate trust for him with $500,000 of her own money, giving the trustee discretion over income and principal. David's creditor cannot reach the principal because of CPLR 5205(c)(1). Ninety percent of the income David is entitled to receive is exempt under CPLR 5205(d)(1), and the court may allow the creditor to reach more only on a showing that the income exceeds David's reasonable needs. The difference between Examples 2 and 3 comes down to one fact: who funded the trust.

Example 4: Grantor Trust with a Tax Reimbursement Clause

Ellen funds a $500,000 irrevocable trust for her children and is not a beneficiary. The trust is a grantor trust, so Ellen reports the trust's income on her own return and pays about $25,000 of tax in one year. The trustee has discretion to reimburse her for that tax. Under the amendment to EPTL 7-3.1, the reimbursement power alone does not make the trust self-settled. If the trust also allowed the trustee to make discretionary distributions to Ellen for her support, that separate power would expose the trust to her creditors.

Indirect Benefits and Arrangements Courts Look Through

Creditors and courts look at substance. A trust may be treated as one for the creator's use even if the creator is not named as a beneficiary.

• Continued use of trust property: If the creator transfers a residence to a trust but keeps living there without paying fair rent, a creditor may argue that the creator retained a beneficial interest.
• Reciprocal trusts: Two spouses who create mirror-image trusts for each other may find that a court treats each spouse as the creator of the trust from which he or she benefits.
• Informal understandings: Evidence that the trustee routinely follows the creator's directions, pays the creator's bills, or returns property on request can support a finding that the trust was for the creator's use or that the transfer was a sham.
• Commingling: When a trustee mixes trust funds with the creator's personal funds, the trust's separate identity becomes harder to defend. The duty to keep fiduciary property separate is discussed in our page on EPTL 11-1.6 and the duty not to commingle.

The Separate Problem of Voidable Transfers

EPTL 7-3.1 is one route for creditors. The Debtor and Creditor Law is another. New York adopted the Uniform Voidable Transactions Act as Article 10 of the Debtor and Creditor Law (§§ 270 to 281), effective April 4, 2020. Under that article, a creditor may set aside a transfer made with actual intent to hinder, delay, or defraud creditors, or a transfer made without reasonably equivalent value while the debtor was insolvent or left with unreasonably small assets.

This matters even for trusts that are not self-settled. A creator who gives away assets to a trust for children, keeping no interest, may still lose that protection if the transfer left the creator unable to pay existing or foreseeable debts. Transfers made before April 4, 2020 are governed by the prior fraudulent conveyance provisions of the Debtor and Creditor Law.

Procedure: How Creditors Reach Trust Assets

A creditor usually needs a money judgment before reaching trust property. Once the creditor has a judgment, the following steps are typical.

1. Obtain information: Serve an information subpoena or subpoena under CPLR 5224 on the debtor and on the trustee to obtain the trust instrument, account statements, and distribution history.
2. Restrain the property: Serve a restraining notice on the trustee under CPLR 5222. A trustee who distributes restrained property after receiving the notice can face personal liability and contempt.
3. Bring a turnover proceeding: Commence a proceeding under CPLR 5225(b) or 5227 against the trustee, as a person in possession of property in which the debtor has an interest, seeking an order directing payment to the creditor. The creditor relies on EPTL 7-3.1 to show that the debtor's interest is reachable.
4. Consider the proper court: Enforcement proceedings are commonly brought in Supreme Court. The Surrogate's Court also has jurisdiction over matters relating to lifetime trusts under SCPA 207, and disputes over a trust's construction, a trustee's conduct, or a trust accounting may be heard there. Where a trustee seeks court direction, or where the creator has died and the trust's assets are tied to estate administration, the Surrogate's Court is often the appropriate forum.
5. Seek income execution where appropriate: If the debtor's interest is a stream of income, the creditor may seek an income execution or an installment payment order under CPLR 5226 and 5231.

For a trustee, a restraining notice or turnover petition calls for prompt review of the trust instrument. The trustee must decide whether the debtor's interest is reachable, whether any exemption applies, and whether to seek court instructions before releasing funds. Trustees considering distributions of principal should also review EPTL 7-1.6 on invading trust principal, since a court-authorized invasion can change what a creditor is able to reach.

Deadlines That Matter

The last row is the one creators most often overlook. Because EPTL 7-3.1 does not depend on intent or timing, simply waiting several years after funding a self-settled trust does not create protection.

Common Pitfalls

• Relying on the word "irrevocable": Irrevocability does not matter under EPTL 7-3.1. What matters is whether the creator can benefit.
• Adding the creator as a discretionary beneficiary "just in case": A single sentence allowing distributions to the creator can expose the entire trust.
• Assuming a later amendment fixes the problem: Removing the creator as a beneficiary through amendment or decanting may limit future exposure, but the change itself is a transfer that can be challenged under the Debtor and Creditor Law. See our discussion of EPTL 7-1.9 and amending an irrevocable trust.
• Confusing creditor rules with Medicaid rules: Medicaid eligibility is governed by Social Services Law § 366 and its own look-back and trust rules. A trust can fail against private creditors and still have different Medicaid consequences, or the reverse. Our page on whether a trust protects assets for Medicaid in New York covers that separate analysis.
• Trustees ignoring a restraining notice: A trustee who makes a distribution after receiving a CPLR 5222 notice risks paying the creditor out of personal funds.
• Funding a trust while a claim is pending: Transfers made after a lawsuit is threatened or filed invite a voidable transfer claim even if the trust is not self-settled.

Planning Options That Remain Available

EPTL 7-3.1 limits self-settled planning, but New York law still permits lawful protection in several forms:

• Third-party trusts: A trust funded by a parent or other relative for a beneficiary receives the protections of EPTL 7-1.5 and CPLR 5205(c) and (d).
• Completed gifts to irrevocable trusts: A creator who keeps no beneficial interest and remains solvent after the transfer can protect assets from future creditors, subject to the voidable transfer rules.
• Statutory exemptions: Qualified retirement plans and individual retirement accounts are generally exempt under CPLR 5205(c), and the homestead exemption in CPLR 5206 protects equity in a primary residence up to an amount that varies by county.

Each of these depends on timing, solvency, and careful drafting. A plan put in place while the creator is solvent and no claims are pending stands on much firmer ground than one assembled after trouble begins.

Representation in Self-Settled Trust Disputes

Albert Goodwin represents judgment creditors, trustees, trust creators, and beneficiaries in disputes involving EPTL 7-3.1, CPLR Article 52 enforcement, and voidable transfer claims in Surrogate's Court and Supreme Court.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].