Kokoszka v. Samatas (In re Samatas), 678 B.R. 109 (Bankr. N.D. Ill. Mar. 2, 2026) (Adv. No. 21 A 00237).
Every cautionary case in asset protection has a timing problem. This one does not.
George Samatas created a trust for his son James in 1988 — decades before any creditor, any judgment, any divorce. He funded it. His son contributed nothing at formation. It contained a spendthrift provision stating that income and principal could not be transferred, assigned, or encumbered by the beneficiary, and could not be subject to interference or control by any of the beneficiary’s creditors.
And the drafting anticipated the exact problem that later destroyed it. The instrument used a restricted trustee construct: a trustee who is also a beneficiary has no authority to make discretionary distributions. Those had to be approved and executed by the co-trustee who was not a beneficiary.
In March 2026, an Illinois bankruptcy court held it was not a valid spendthrift trust, found it to be the debtor’s alter ego, pierced it, and brought its assets into the bankruptcy estate.
The protective clause was in the document. It was worth nothing, because the person it depended on did not function.
Key Points
Timing was perfect and it did not matter. The trust predated the claims by roughly thirty years.
The drafting was not naive. A restricted-trustee clause barred the beneficiary from making his own distributions.
It failed because the unrestricted trustee did not function. The court called him “essentially a nonfunctioning trustee.”
The investment advisor role is what carried the damage — including authority to direct loans of trust assets to himself.
Illinois requires three elements. The court never reached the second one.
§541(c)(2) excludes only valid spendthrift trusts from the bankruptcy estate. That word did all the work.
What the Trust Said
The 1988 instrument named two co-trustees: James Samatas himself and Craig Labus, a family friend. The trust held personal property and interests in entities owning and operating nursing facilities.
The distribution provisions were drafted with this risk in mind. Trustees could make discretionary distributions — but trustees who were also beneficiaries, defined as restricted trustees, had no authority to do so. James was a restricted trustee. Discretionary distributions had to be approved and executed by Craig, who was not a beneficiary.
That is the standard solution to the beneficiary-as-trustee problem, and it was in the document.
Then the instrument handed the beneficiary something else. As investment advisor, James had absolute discretion over how trust assets were invested — including directing the trustees to lend trust assets to him.
The check on that was procedural: as investment advisor, James was required to provide written instructions to Craig, who would execute the investment decisions.
How It Actually Operated
A trust is not a document. It is a pattern of conduct, and this pattern ran for decades.
The written-instruction requirement was ignored. There was no evidence James ever provided written instructions, that Craig took any action regarding investments, or that Craig was even aware of James’s transactions.
The court’s description of Craig is the sentence this case turns on:
Distributions were relabeled as loans. James produced no evidence that transfers to himself characterized as loans were documented, or that they required interest or repayment within any specified time. The court characterized them as distributions rather than loans — which he had no authority to make, either as investment advisor or as a restricted trustee.
He executed them unilaterally anyway, which the court held violated the terms of the trust.
He opened trust bank accounts and treated them as his own. He sold property held by the trust.
And he forgave a loan from the trust to himself — by filing a waiver of claim on behalf of the trust in his own bankruptcy case. The court treated that as an unauthorized distribution.
The Three-Element Test, and Where It Broke
Under 11 U.S.C. §541(c)(2), a valid spendthrift trust is excluded from the bankruptcy estate. James invoked it. The bankruptcy trustee argued the trust was not valid under Illinois law.
Illinois requires three things. The trust must restrict the beneficiary from alienating his interest. It must not be self-settled. And it must place the trust assets beyond the debtor’s control.
Element one was satisfied. The anti-alienation provision was there.
Element two the court declined to decide. It was unnecessary, because element three failed.
Element three is the holding. The court found James exercised exclusive and effective dominion and control over the trust corpus — more control than Illinois spendthrift law permits.
The findings that produced it: the trust’s language, James’s and Craig’s own interpretations of its terms, James’s actions, and Craig’s lack of involvement in or authorization of any of it.
Holding: the spendthrift provision was invalidated, and the trust assets became part of the bankruptcy estate.
Alter Ego, and Piercing the Trust
The court went further. It found the trust was merely the alter ego of James, who had unfettered access to the assets and disregarded the instrument’s requirements.
So it allowed the trust’s veil to be pierced, enabling the bankruptcy trustee to reach the assets for James’s creditors.
Two independent routes to the same place. Invalidate the spendthrift provision under §541(c)(2), or pierce the trust as an alter ego. The court took both.
The Transfers
The court also found that certain transfers of personal property by James to the trust were fraudulent under the Illinois Uniform Fraudulent Transfer Act, made with intent to hinder, delay, or defraud his creditors.
Note the direction. These were transfers into the trust — the kind of move people make believing it protects them. The court unwound them on intent.
Every structure rests on four questions. This one passed the first cleanly and failed the rest.
Timing — passed, decisively. Created in 1988, funded by the father, decades before any claim. This is the cleanest timing record of any case in this library, and it did not save the trust.
Control — fatal. Beneficiary, co-trustee, and investment advisor, with authority to direct loans of trust assets to himself — and a co-trustee who did not function.
Jurisdiction — absent. Illinois trust, Illinois law, domestic trustees, domestic assets. Nothing sat outside the court’s reach, so the court never needed contempt. It declared the assets estate property.
Collectibility — zero. Once the spendthrift exclusion failed, the trustee did not need to collect anything. The assets were already in the estate.
What This Case Actually Teaches
A restricted-trustee clause is not enough
This is the finding that makes Samatas worth reading. The drafter saw the problem. The instrument said a trustee who is also a beneficiary cannot make discretionary distributions. That is the right provision.
It failed because the trustee who could make distributions never did anything. Craig did not receive written instructions, did not execute investment decisions, did not authorize transactions, and by the court’s description was not functioning as a trustee at all.
A restriction on one trustee is only as strong as the other trustee. If the unrestricted trustee defers to the beneficiary on everything, the restriction exists only on paper — and a court will read the conduct, not the clause.
The investment advisor role carried the damage
The distribution restriction was real. The investment authority was not restricted at all.
James had absolute discretion over investments including directing the trustees to lend trust assets to him. That is the channel through which everything else flowed — the “loans” that were really distributions, the property sales, the bank accounts.
Separating distribution power from investment power sounds careful. The court looked at de facto control and found the separation meaningless.
Loans without loan terms are distributions
No documentation. No interest. No repayment schedule. A court will call that what it is.
And forgiving the loan is a second distribution — which is exactly how the bankruptcy waiver was treated.
Which means the drafting lesson is narrower than “don’t name your kid”
It is: do not give a beneficiary a role with authority, and do not rely on a family member or friend to be the check.
The person who is supposed to say no has to actually be capable of saying no — repeatedly, to someone they care about, over decades. A professional trustee that refuses to execute what the instrument does not authorize, and that keeps records, produces a different case entirely.
Suppose George Samatas had named an independent trustee and given his son no role beyond beneficiary. Thirty years later James gets into financial trouble and files bankruptcy. A trustee looks at a third-party spendthrift trust the debtor did not create, does not control, and cannot compel — and the §541(c)(2) exclusion holds.
The most consequential decision in this case was made at formation, by the father, with good intentions.
It feels reasonable to give a child a role in their own trust. It teaches responsibility. It provides a check on an outside trustee. And on these facts it cost the beneficiary the protection the trust existed to provide.
What This Means If You Are Leaving Assets to Children
Third-party spendthrift trusts are the strongest protection in this field. This is how they get dismantled.
Do not name the beneficiary as trustee or co-trustee — not even with a restricted-trustee clause. Samatas is what that clause looks like when nobody enforces it.
Be careful with advisory roles that carry real authority. An investment advisor who can direct loans to himself has control regardless of what the distribution provisions say.
Make at least one trustee genuinely independent and genuinely willing to refuse. A family friend who ratifies decisions after the fact is not a check — he is evidence that no check existed.
Consider a professional corporate trustee. A trust company that will not execute what the instrument does not authorize, and that maintains records, changes the entire analysis.
And require that the formalities actually be followed. Written instructions where the document requires them. Real loan terms where there are loans. Separate accounts. Every one of those failures was cited by the court.
FAQs
Wasn’t this a third-party trust? Those are supposed to be protected. Yes, and normally they are — §541(c)(2) excludes valid spendthrift trusts from the bankruptcy estate. It failed here because the beneficiary held roles giving him effective control, and because the trust was operated as his own account.
What are Illinois’s requirements for a valid spendthrift trust? Three: the trust must restrict the beneficiary from alienating his interest, must not be self-settled, and must place the assets beyond the debtor’s control. The court found the third element failed and did not reach the second.
The document said he couldn’t make distributions to himself. Why didn’t that work? Because the trustee who could make them was, in the court’s words, essentially a nonfunctioning trustee. James executed transfers unilaterally and the court held he had violated the trust’s terms by doing so.
What made the “loans” distributions? No documentation, no interest requirement, and no repayment within any specified time. The court characterized them as distributions rather than loans.
What is a restricted trustee? A trustee who is also a beneficiary, barred by the instrument from making discretionary distributions. This trust had that provision. It was not enough.
Does an advisory role create the same risk as a trustee role? It can. James’s investment-advisor authority included directing the trustees to lend trust assets to him — which is control by another name.
Does filing bankruptcy change the analysis? Materially. This came before a bankruptcy court applying §541(c)(2), with a Chapter 7 trustee holding avoidance powers a judgment creditor does not.
The trust was not created in a panic. It was not funded to defeat a claim. It predated the litigation by roughly three decades and was created by someone other than the person it protected — the strongest posture available in this field. And the drafter had anticipated the beneficiary-as-trustee problem and written a provision addressing it.
It still failed, because the beneficiary held roles that gave him control and the person meant to check him did not function.
Perfect timing does not survive bad control. That is the entire holding, and it is the mirror image of the cases where the structure was sound and the timing was not.
I spent the early part of my career on the plaintiff’s side of civil litigation. The structures that came apart came apart for the same two reasons every time: the debtor still controlled what he claimed to have given away, or he built it after the claim was already in view.
This one was built thirty years early. The first reason was enough.
Structure before stress.
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By: Brian T. Bradley, Esq. — National Asset Protection Attorney
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