Bankruptcy Code § 548(e)(1) says fraudulent transfers to a self-settled trust can be set aside for up to 10 years prior to the filing of the bankruptcy petition. A self-settled trust is a trust that one creates for oneself. But what if the trust documents say that it is not self-settled such that the trust settlors do not have any beneficial rights, yet the trust has been operated as if they do?
Greenmed and Purplemed were not-for-profit companies that were licensed to grow and sell marijuana in Arizona. These two companies were managed by a company called Turnkey in which Murphy and Barbara Kittrell owned an interest.
The ownership of Turnkey being disputed with some third-party, the Kittrells formed four new companies to replace Turnkey, Greenmed and Purplemed. These four companies were MKHS Holding Company LLC which owned its subsidiary MKHS LLC, and then MKHS LLC itself owned two subsidiaries: MKHS Cultivation Services LLC and MKHS Dispensary Services LLC. All these companies were ultimately owned by the Kittrells.
In 2014, and shortly after the four MKHS companies were formed, the Kittrells created their Children’s Trust under Arizona law. The Kittrells were both the grantors of the Children’s Trust as well as the Trustees, and the beneficiaries were their children and later grandchildren as well.
Next, the Kittrells transferred their ownership interest in MKHS Holding Company LLC to the Children’s Trust, which meant that the Children’s Trust now owned MKHS Holding Company LLC which owned MKHS LLC which itself owned both MKHS Cultivation Services LLC and MKHS Dispensary Services LLC. Or, in other words, the Kittrells no longer owned the four companies, but now the four companies were owned by the Children’s Trust. Interestingly, the Kittrells did not file any gift tax returns when they transferred the MKHS companies to the Children’s Trust.
The was evidence that the purpose of the Children’s Trust was to provide a vehicle by which the Kittrells transferred their assets to their children to protect those assets from their own creditors. Murphy testified that creditors were interfering with his businesses and Barbara testified that the Children’s Trust was formed “at least in part, to protect their assets against certain creditors she perceives to be ‘thieves.’ “
The transfer of the MKHS companies to the Children’s Trust basically left the Kittrells without any non-exempt assets. At the time of these transfers, the Kittrells owed outstanding judgments in excess of $1.5 million which would remain substantially unpaid.
The Trust Agreement for the Children’s Trust had some interesting features. The Children’s Trust was said to be an “irrevocable Business Trust” and the Kittrells had no power to alter, amend, revoke or terminate the trust. The trust also featured a so-called “Anti-Reversion Clause” which stated that no part of the trust estate could revert back to the Kittrells.
The Trust Agreement did give the Kittrells’ son powers to amend and revoke the Children’s Trust. The Kittrells’ son a “Limited Power of Appointment” to make certain amendments, add and remove beneficiaries who were heirs of the Kittrells’ parents (i.e., including the Kittrells themselves), and to “revoke” the trust with the trust assets going to the heirs of the Kittrells’ parents (again, which could include the Kittrells themselves).
Further, the Trust Agreement allowed the Kittrells as Trustees the right to substitute property in the trust, e.g., to take their property back from the Children’s Trust and replace that property with a promissory note. The Kittrells were also allowed to hold the assets of the Children’s Trust in their own names, and well as to both lend to the Children’s Trust and to borrow from the Children’s Trust.
Later, in 2020, the Children’s Trust was amended to allow the Kittrells’ son to transfer the trust assets to another trust (including another trust created by the Kittrells), subject to the Kittrells’ consent.
All that is what the Children’s Trust stated. Now let’s look at how the Children’s Trust was actually operated in reality. Although the MKHS companies were legally owned by the Children’s Trust, Murphy Kittrell managed the MKHS companies. No distributions were ever made by the Children’s Trust to any of its beneficiaries, and the beneficial shares of that trust were not divided into separate shares for each of the beneficiaries as was also required by the 2020 amendment.
Further, the Children’s Trust never had any bank accounts or records of its own and the Kittrells as trustees never made any written reports or statements to the beneficiaries about the Children’s Trust, although the Kittrells claimed to have kept the beneficiaries informed about the trust at “weekly family dinners”. The Children’s Trust also never filed any tax returns, but instead the Kittrells treated the trust income and losses as their own, although the Kittrells for some periods of time claimed to have incurred no individual tax liability.
Although the assets of the Children’s Trust were ostensibly owned by the trust and not by the Kittrells individually, Murphy Kittrell held those assets to be his own for purposes of guaranteeing his individual obligations. Murphy also “held himself out to others as both the sole member of MKHS Holding and an owner of MKHS, including in tax returns signed under penalty of perjury.” Other trust assets were transferred by Murphy to third-parties, and other transactions involving trust assets directly benefitted the Kittrells.
We will soon enough be considering the Kittrells’ bankruptcy. Before we get there, however, we need to examine some transactions less than sixty days before their bankruptcy filing.
Within that sixty days, the Purplemed dispensary operations were sold for $15 million, pursuant to an asset purchase agreement known as the “Purplemed APA”. Murphy Kittrell signed the Purplemed APA on behalf of Children’s Trust and the MKHS entities. Under something known as the “Funds Flow Memorandum”, certain creditors of the Kittrells and their entities were paid in excess of $11 million. Another almost $2 million was to be paid to “Balance to Seller”.
On February 25, 2022, the Kittrells filed for Chapter 7 bankruptcy. Except for a little bit of cash, the Kittrells claimed that they had no assets to pay somewhere between $4 million and $6.5 million in allowed creditor claims and administrative expenses of the bankruptcy.
After the Kittrells’ bankruptcy petition was filed, on November 11, 2024, MKHS Dispensary contracted with a company called A&R Consultants, LLC, to manage the Greenmed operations. Under the A&R Agreement, the amount of $125,000 in monthly payments were to be made to MKHS Dispensary, from which the Kittrells received a salary, and some debts were to be paid. A&R also loaned $525,000 to Murphy Kittrell personally, with MKHS Dispensary being obligated to repay the loans in the event of default.
Back in the Kittrells’ bankruptcy, the Chapter 7 Trustee (the “BKTrustee”) brought an adversary action to determine that the property in the Children’s Trust was property of the Kittrells’ bankruptcy estate. The BKTrustee also alleged that the Kittrells had fraudulently transferred assets to the Children’s Trust and that such transfers should be avoided for the benefit of the Kittrells’ creditors.
The Kittrells countered that the assets of the Children’s Trust were not part of their bankruptcy estate and that they had not fraudulently transferred any assets to that trust ― or that, if they had, the limitations period for those transfers had long since expired.
For its part, the U.S. Bankruptcy Court for the District of Arizona held a two-day trial on the BKTrustee’s adversary action with both sides presenting testimony and other evidence. This trial resulted in the court’s opinion in Linscott v. Kittrell (In re Kittrell), 2026 WL 2151539 (Bk.D.Az., July 24, 2026), which we shall now examine.
The first issue considered by the Bankruptcy Court is intensely interesting. The issue is whether Bankruptcy Code § 584(e)(1) applied to the Children’s Trust. Section 548 in general states the bankruptcy law on fraudulent transfers. But more specifically, § 548(e)(1) provides that:
“the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if —
“(A) such transfer was made to a self-settled trust or similar device;
“(B) such transfer was by the debtor;
“(C) the debtor is a beneficiary of such trust or similar device; and
“(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.
A self-settled is a form of trust that somebody creates for themselves as beneficiaries and then they stand behind the spendthrift protection of that trust when a creditor appears. The Domestic Asset Protection Trust (“DAPT”) is an example of a self-settled trust.
The Bankruptcy Court noted that the bankruptcy statutes do not define who is a beneficiary and that the issue would be determined by Arizona state law. The Arizona Trust Code denies a beneficiary as including any person “who has any present or future interest, vested or contingent, and includes the interest by assignment or other transfer.”
Looking at the Limited Power of Appointment given to the Kittrells’ son, the Bankruptcy Court saw that the power allowed the Kittrell’s son to add the Kittrell’s as beneficiaries of the Children’s Trust, as well as remove all the other beneficiaries such that the Kittrells then became the only beneficiaries. The power also gave the Kittrells’ son the right to revoke the Children’s Trust and distribute all the assets to the Kittrells. Moreover, that same power allowed the Kittrells’ son to transfer all the assets of the Children’s Trust to another trust ― including a new trust that might be created for the benefit of the Kittrells.
Based on all this, the Bankruptcy Court concluded that the Kittrells qualified as “beneficiaries” of the Children’s Trust, albeit contingent beneficiaries. The Bankruptcy Court also rejected the Kittrells’ argument that the Anti-Reversion Clause in the Children’s Trust somehow kept them from being contingent beneficiaries. That clause only blocked the Kittrells from directly taking back the trust’s assets but did not block them from taking the assets back indirectly.
Moreover, the Bankruptcy Court continued, Murphy Kittrell held himself out as the owner of the assets of the Children’s Trust. The Kittrells also pledged those assets to obtain personal loans and used some of those assets to pay off millions of their personal debt. Then there was also that the Children’s Trust document allowed the Kittrells to substitute property in the trust, to hold trust property in their own names, and to borrow from the trust.
All these facts established that the Kittrells were effectively beneficiaries of the Children’s Trust. Because the Kittrells created and funded the Children’s Trust themselves, the Children’s Trust was a self-settled trust for purposes of § 548(e)(1).
The Bankruptcy Court’s next turned to whether the Kittrells made their transfers to the Children’s Trust with the intention of defeating the rights of their creditors. There was plenty of evidence on this point, the most important being that the Kittrells were being chased by creditors at the time of their transfers and the transfers left them insolvent and unable to satisfy their debts.
But even on top of insolvency were other bad facts. Although the Children’s Trust was for the supposed benefit of the Kittrells’ heirs, the trust never made any distributions to them. Instead, the Children’s Trust was used and abused by the Kittrells for exclusively their own purposes and in fact the Kittrells treat the trust assets for nearly all purposes as their own.
In addition to all this was the Kittrells’ own admissions that they created and funded the Children’s Trust for the very purpose of stiffing their creditors:
“In this case, although the Kittrells testified that they formed the Children’s Trust and transferred their Ownership Interest into the Children’s Trust as a legitimate estate planning tool, the Kittrells have admitted that they formed the Children’s Trust and transferred their Ownership Interest to the Children’s 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 creation of the MKHS entities and the transfer of the Ownership Interest into the Children’s Trust on the Formation Date reflect that the Kittrells’ primary intent was to shield valuable assets from their creditors.”
Having demonstrated that the Kittrells’ transfers to the Children’s Trust was voidable as a fraudulent transfer, the next question was how to grant the BKTrustee appropriate relief. For his part, the BKTrustee requested that a money judgment of $6.5 million which would allow all the creditors in the bankruptcy proceeding to be paid.
Because Purplemed and Greenmed had been sold for an amount in excess of the $6.5 million requested by the BKTrustee, and those funds had been deposited in the Children’s Trust, the Bankruptcy Court determined that it would grant the $6.5 million request in full. The Bankruptcy Court also awarded both pre- and post-judgment interest to the BKTrustee so that all the Kittrells’ creditors would be made whole, with interest.
A bit of final lagniappe handed to the BKTrustee was a ruling that all the assets of the Children’s Trust was determined to be part of the Kittrells’ bankruptcy estate. While the Bankruptcy Court’s opinion does not state this, the ostensible reason for that holding was to allow the BKTrustee to take immediate possession of the assets of the Children’s Trust and begin liquidating those assets for the benefit of the bankruptcy estate and, thus, creditors.
ANALYSIS
It is commonly said that “bad facts make bad law”. This is true, but it is also true that it becomes precedential law nonetheless. This is a bad facts case. No, this is a very bad facts case. But there are still important lessons that we can take away. Many of these lessons are old ones but they are good reminders nonetheless.
One lesson is that with trusts, or really with any legal entity, correctly structuring the trust only is a part of the solution. The other part of the solution is that the trust must be operated in a fashion commensurate with its purposes. The main reason that high-quality asset protection structures are penetrated is because they were misused or disregarded. I can’t tell you how many times that I’ve seen a real estate developer spend six figures to create an elaborate asset protection structure (“I won’t be caught with my pants down again!”) only to soon start pledging the assets within that structure as collateral to back personal guarantees on deals (“I was able to save 0.01% on my interest rate!”).
Some of the problem is that even the best asset protection plans do not come with a user’s manual. The client comes into the office, the planning is done, and the client walks out with several binders of documents. What happens after that is committed to the good common sense of the client who usually leaves that office with only vague notions about what has been done so far and what needs to be done in the future. Oh sure, the client may be given a letter from the planner with general advice on how to run things, but those instructions will soon be forgotten. The smarter clients will hire somebody to oversee the structure but this is the exception and not the norm.
Then there are folks who create things, as the Kittrells did here, with the idea of misusing the trust from the get-go. They might as well not even bother because ― as demonstrated here ― that doesn’t work. It might hold off creditors for a while, but basically one is hiding behind a wall made of paper mache. It will get cut through eventually.
A more specific lesson goes to powers of appointment. A popular form of asset protection trust is known as the “special power of appointment trust” or sometimes as a “SPA Trust”. The idea here is that the trust appears to be a non-self-settled irrevocable trust, but there is a backdoor by which the trust creator can later be added back into the trust. A “springing beneficiary” if you will. Neat idea, but it doesn’t work for the reasons found in this case. If the trust settlor can later be added as a beneficiary, no matter how remote that possibility, then you have a self-settled trust.
This is the problem with all backdoors in asset protection. If the debtor can access a backdoor and regain control of assets, so can creditors. That was ultimately the problem with offshore trusts a/k/a foreign asset protection trusts or “FAPTs”. The courts determined that even though it appeared that the debtor did not have any control over assets, that was merely an appearance for design and the courts would presume that the debtor could still exercise control over the trust assets one way or another. That left the debtor having to prove the negative that the debtor really didn’t have any way to re-establish control over trust assets, and such was (and still is) a very tough sell.
Much like computer programmers who fear being locked out of the very programs they create, asset protection planners have a tendency to build backdoors into the plans they create. Their clients only want their assets to be protected; they don’t really want to lose control over those assets. Indeed, some might suggest that asset protection planning is the science or art of separating clients from their assets while still allowing those clients the beneficial use and enjoyment of those assets. The problem is, which this case so well illustrates, that to the extent that the debtor has the ability reacquire the assets then potentially so does a creditor. Like backdoors in computer programming, backdoors in asset protection are highly dangerous and may allow a creditor to hack them.
The worst place that a debtor can be is usually bankruptcy. The bankruptcy courts and bankruptcy trustees have very strong powers to claw assets back into the bankruptcy estate. One of those powers is Bankruptcy Code § 548(e)(1) for fraudulent transfers to self-settled trusts “and similar devices”. With a 10-year limitations period, measured backwards from the bankruptcy petition date, all transfers to such trusts are amenable to being set aside if there are enough other facts to establish a fraudulent transfer. That includes creating such a trust for asset protection purposes, since that is basically an admission of a purpose to defeat creditors. Since 548(e)(1) operates in federal law which is supreme to contrary state statutes, § 548(e)(1) poses the greatest risk to self-settled asset protection trusts domestic or foreign. The upshot is that unless a debtor can stay out of bankruptcy, voluntary or involuntary, the waiting period for a self-settled trust such as a DAPT to become “old and cold” and thus completely safe is 10 years.
But what about that “and similar devices” language. Well, now more than twenty years after the adoption of § 548(e)(1) and we really don’t have a good idea what the phrase “and similar devices” means. Some might suggest that it has to be a self-settled trust, but that as a matter of statutory interpretation would make redundant the explicit reference to self-settled trusts and such is a no-no. Also, the use of “devices” means that it is not limited to just trusts or else the statutory language would have said so.
I would suggest that even if the bankruptcy court here found that the Kittrells were not beneficiaries of their Children’s Trust that it would have qualified as a similar device. If not technically self-settled, it was at least close in concept ― and certainly in operation ― to a self-settled trust. It is our loss that the bankruptcy court did not take the time to consider the Children’s Trust as potentially a “similar device”.
Finally, this is a case about “pigs get fat and hogs get slaughtered”. In the end, the Kittrells end up paying their creditors 100 cents on the dollar, with pre- and post-judgment interest. Suffice it to say that the Kittrells could probably have negotiated much better deals with their creditors than 100 cents on the dollar. But, no, the Kittrells attempted to stiff their creditors entirely by way of their Children’s Trust. Creditors will usually take something reasonable that is less than the full amount to cut their own losses and move on to their next problem deal. It is when creditors and bankruptcy trustees are cut out completely that they will shift into total war mode. Here, the bankruptcy trustee knew about the Purplemed sale for $15 million and that most of the funds were in the Children’s Trust.
This was painting a bright red bullseye on the hog that was soon to be slaughtered.
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