106 Iowa L. Rev. 1477 (2021)

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Abstract

Over the past couple of decades there has been an increase in people taking more active steps to protect their financial security due to outside events like the 2008 Recession and increased aggression from creditors. Because of this trend, irrevocable trusts have grown in popularity around the country as a way to best protect assets from creditors. This increased usage has opened up the possibility of these irrevocable trusts being used for abusive practices by their settlors. This susceptibility to abuse is partially because many courts have begun to apply the alter ego doctrine, a form of veil piercing traditionally applied to corporations, to irrevocable trusts in allowing creditors to access the assets in those trusts when the circumstances would deem not doing so unjust. The alter ego doctrine gives judges wide discretion when deciding whether to apply the doctrine, which creates uncertainty in the application of the law. This uncertainty then creates a situation where individual settlors do not know what the law actually is, which in turn could lead to more irrevocable trusts being used in such a way that could end up constituting abuse. This is particularly true in Iowa where the courts have yet to recognize that this kind of application is possible, and it is likely they will have to face this question sooner rather than later. This Note argues that Iowa should regulate this application of the alter ego doctrine through statute. This approach will limit judicial discretion and, in doing so, will allow for citizens of Iowa to understand the law regarding irrevocable trusts while using them. This Note also proposes an example of such a statute, which is inspired by other states and current Iowa alter ego law.