Alienability of Trust Beneficiaries' Interests and Creditor Rights Flashcards
Alienability of a Beneficiary’s Interest
Absent a restrictive provision to the contrary, a trust beneficiary may freely assign (gratuitously in a gift or for consideration in a sale or other K) the equitable title or right to receive income or principal from a trust.
Restrictive Covenants on Beneficiary Interests
Must be reasonable and cannot violate public policy.
Restrictive Covenants that Violate Public Policy
Include covenants that condition continuation of beneficiary’s income interest on beneficiary’s marriage or divorce (except when the beneficiary is the settlor’s spouse).
Support Provision
Directs the trustee to provide only so much as is necessary for the beneficiary’s support and for no other purpose.
How is Support Measured?
Usually in terms of the lifestyle to which the beneficiary has become accustomed.
Beneficiary’s Discretionary Interest
When the trustee pays as much income as the trustee believes desirable.
Challenging a Trustee’s Discretion
A trustee’s actions pertaining to matters within their discretion are not subject to attack unless there has been an abuse of that discretion or a complete failure to exercise it.
What Constitutes Abuse of Discretion?
Abuse of discretion depends on the terms of the trust and the other fiduciary duties of a trustee.
If a Beneficiary Cannot Get Trust Funds, Do the Beneficiary’s Creditors Have Any Rights?
- If the beneficiary cannot compel the trustee to pay over or distribute any part of the trust fund, beneficiary’s creditors are in no better position even if trustee’s failure to make payments constituted abuse of discretion.
- A creditor of the beneficiary could attack the trust and secure a lien on the trust property but the trustee with absolute discretion would never have to pay out.
Spendthrift
A provision that says that a beneficiary cannot voluntarily transfer their property nor can a creditor attack it. Are not absolute and can be defeated by claims of:
- alimony or child support owed by the beneficiary; or
- the provision of necessities to the beneficiary; or
- gov. claims against the beneficiary
Is Spendthrift Possible When the Settlor is the Beneficiary?
No, a settlor cannot make their interest subject to a spendthrift provision.
Revocable Trusts: Can a Creditor Force a Settlor to Exercise their Right to Revoke?
No. But a bankruptcy court can.
Disclaimer of Trust Interest
A beneficiary can disclaim their interest under a trust
- under CL –> the beneficiary’s share goes to the other beneficiaries
- under UPC –> the beneficiary’s share goes to her heir
