Alienability and Creditors Rights: Spendthrift and Support Trusts

Question 1

T creates a trust with income required to be distributed to Sam for life; remainder to Sam’s son (Sam has right to periodic distribution of income, though we do not know those intervals, we need to see more of the instrument) - Sam and the Trustee have a falling out and the Trustee stops distributing the income to Sam. What are Sam’s rights?

Answer 1

Sam can go to court and get an order to direct the trustee to distribute (do what you should be doing). If persists Sam can go to court and ask that the trustee be removed, for breach of trust (persisting). Usually if there is a breach of trust court will remove

Question 2

T creates a trust with income required to be distributed to Sam for life; remainder to Sam’s son (Sam has right to periodic distribution of income, though we do not know those intervals, we need to see more of the instrument) Sam wants to sell his income interest. Can he?

Answer 2

Yes - Income interest is a fridge (can be bought, sold, or given away) Theoretical answer and bar answer - Practical answer much different, too risky to sell, you as a buyer are buying a periodic income according to Sam’s life

Question 3

T creates a trust with income required to be distributed to Sam for life; remainder to Sam’s son (Sam has right to periodic distribution of income, though we do not know those intervals, we need to see more of the instrument) Sam runs up a large bill at Sears. What are Sears’ rights to satisfy their claim out of the trust?

Answer 3

NO, no right to get the actual trust right assets, Sam does not own them, but sears can garnish the income stream (not actually garnishment but looks so much like it that is what we call it, really a court order)

Question 4

S transfers one million dollars to trustee to pay the income to S’s son Aaron for life. On death of Aaron, principal is to be distributed to Aaron’s child (C). Trust provides that “No interest of any beneficiary herein shall be assignable by such beneficiary nor shall it be subject to the claims of the beneficiary’s creditors.” Aaron builds an expensive home for $500,000 signing note for purchase price. In performance of the obligation, Aaron assigns to the payee $50,000 yearly for eight years out of trust income. Three years later Aaron instructs the trustee to make no more payments to the creditor. The creditor sues Aaron and seeks to enforce the assignment or to reach Aaron’s interest in the trust. What result?

Answer 4

Out of luck, Spend Thrift clauses are valid and enforceable, creditor should not have extended credit to Aaron on this income; EXCEPTIONS:

1. Claims for necessities (i.e. clothes, food, shelter)
2. Alimony and child support obligations.
3. Claims by US or a state

Question 5

What is a spendthrift provision?

Answer 5

A “spendthrift provision” is a provision in a Trust or a Will that protects a beneficiary from assigning away his or her inheritance and it also protects against a creditor attaching the beneficiary’s inheritance

Question 6

What is a discretionary support trust and what are its terms? - Read the terms of the trust, what discretionary power is given the Trustee and apply that

Answer 6

1. A trust used to support a beneficiary at the discretion of the Trustee, when the beneficiary can support himself the Trustee may distribute, but does not have to
2. In a discretionary support trust, if the beneficiary cant support himself, the trust supports him
   *The beneficiary may not compel the trustee
   EXEPTION - Claim by a child or support for alimony

Question 7

D transfers stock to a revocable inter vivos trust, the terms of which provide that the income is to be distributed back to D for his life, remainder at his death to his children. The trustee, BANK, has authority “to pay out of trust corpus such sums as BANK determines to be in D’s best interest.” The trust instrument also contains a spendthrift clause. D runs up some bills that he is unable to pay. What are the creditors’ rights?

Answer 7

As to trusts for the benefit of the settlor (D):
1. Spendthrift clauses are unenforceable so the creditor can reach any right to distributions D has in the trust.
2. In addition, D’s creditors may reach the actual trust property if D has the power to revoke the trust OR (even if he doesn’t) if the trustee has discretionary authority to make distributions to settlor.
3. As to irrevocable trusts for third persons, settlor’s creditors have no rights.
EXCEPTION: The Fraudulent Transfers Doctrine - If the trust was created initially with the intent of defeating known creditors than it can be set aside