(8) Trusts: Creditors

Question 1

Spendthrift Trust Provision Definition

Answer 1

A spendthrift trust provision is one that prevents the transfer of a beneficiary’s interest.

Question 2

Spendthrift Interest Definiton

Answer 2

A spendthrift interest means that the interest cant be sold or assigned by the income beneficiary, nor may any creditors reach it (but creditors may attempt to collect directly from the beneficiary after a payment is made from the trust).

Question 3

Rule & Exceptions

Spendthrift Interest

Answer 3

A spendthrift provision in a trust limits a creditors ability to reach a beneficiaries income but is only valid if it restrains both voluntary and involuntary transfers.

• Exceptions: There are 5 exceptions when a creditor can reach the beneficiary’s income interest: (1)a judgement creditor who has provided services for protection of a beneficiary’s interest in the trust; (2) a creditor who furnishes necessities; (3) an order for child support or alimony; (4) any claim by the state or federal government (i.e., Federal tax liens); or (5) a revocable trust (aka when a settlor retains an interest). Plus there are no protections for mandatory distributions of trust property.

Question 4

Rights of Creditors Not Subject to Spendthrift Rule

Answer 4

If the beneficiaries interest is not subject to a spendthrift provision then the court may authorize a creditor to reach the beneficiaries interest by attachment of present or future distributions to the beneficiary.

Question 5

Rights of Creditors Subject to Spendthrift Rule

Answer 5

If the beneficiary’s interest is subject to a spendthrift provision then the creditor is prohibited from attaching interest and may only attempt to collect directly from the beneficiary after a payment is made.

Question 6

Rights of Creditors Remainder Beneficiary Rule

Answer 6

if the debtor is a remainder beneficiary then the creditor will need to wait until the trust terminates to receive the trust property.

Question 7

Discretionary Trusts

Answer 7

A creditor cannot compel a distribution to a beneficiary that is subject to the trustee’s discretion. However, if the trustee decides to make a payment after receiving notice from the beneficiaries creditors then they must make the payment to the creditors.

Question 8

Revocable Trust

Answer 8

Creditors of the settlor may reach assets of a revocable trust.

Question 9

Irrevocable Trusts

Answer 9

Creditors of the settlor may not reach the assets held within an irrevocable trust except for claims relating to child support, alimony, and fed/state taxes.