Alienation of Trusts

Question 0

What is alienation?

Answer 0

The passing of trust property during the beneficiary’s life.

Question 1

When does alienation applies?

Answer 1

It applies exclusively to testamentary trusts

Question 2

What are the categories of trusts?

Answer 2

1. Discretionary
   a. Purely discretionary
   b. support trust
2. Spendthrift

Question 3

What is a purely discretionary trust?

Answer 3

1. Trustee = has sole & absolute power over everything
   a. decides if when, if, how & to whom the trusts assets will be distributed
2. Beneficiary = prohibited from alienating any of the assets
   a. cannot use trust assets as collateral, cannot compel distribution, cannot give them to someone

Question 4

Creditors & purely discretionary trust

Answer 4

1. The creditor cannot reach trust assets (not even the state)
2. Creditor cannot compel the trustee to distribute anything
   BUT, the creditor MAY get a court order compelling the trust to distribute assets to him if the IF THE TRUSTEE SHOULD EVER DISTRIBUTE ANYTHING

Can get around this by the trustee paying & making purchases for the beneficiary directly avoiding the opportunity for the creditor to attach

Question 5

What is a support trust?

Answer 5

(1) A support trust is a trust that requires the trustee to pay as much income (and, if expressly provided in the trust, principal as well) as necessary for the beneficiary’s support and education

(2) Has some mandatory provisions that the trust cannot escape
a. Set distributions to be made periodically for the “health, support, maintenance, and education” of the beneficiaries

Question 6

Creditors & support trusts

Answer 6

a. Support trust bars all ordinary creditors
i. EXCEPTIONS
• Creditors may compel distribution for:
• Child/spousal support
• Alimony
• Providers of necessaries (food, clothing, health care, shelter)

Question 7

What is a spendthrift trust?

Answer 7

Prohibits beneficiaries are transferring their interest

Question 8

Creditors and spendthrift trusts

Answer 8

Creditors may not attach their interest
Creditors cannot get a court order compelling distribution to them first

***** Settlor cannot create such a trust for himself in order to keep creditors away.

Question 9

What is the UPC take on spendthrift trusts?

Answer 9

iv. UPC 2-502
(a) Beneficiary cannot transfer funds without trustee doing so
(b) Creditors cannot penetrate spendthrift provision… UNLESS
(1) Proving support or maintenance for beneficiary
(2) Providing trust protection for the trust assets (lawyers and trustees)
(3) Providers of necessaries
(4) IRS