Beneficiary/Creditor Rights to Distribution

Question 1

When can a beneficiary’s creditors reach trust income and principal?

Answer 1

Only when such amounts become payable to the beneficiary or are subject to her demand

Question 2

Is a beneficiary’s interest in a trust transferable?

Answer 2

Yes, freely alienable unless a statute or trust instrument provides otherwise.

E.g. Can be used as collateral for a loan

Question 3

What is a support trust?

Answer 3

A support trust directs the trustee to pay income or principal as necessary to support the trust beneficiary

Question 4

Can creditors reach the assets of a support trust?

Answer 4

No except to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee

Question 5

Can creditors access income/principal from a discretionary trust?

Answer 5

Yes. When the trustee exercises his/her discretion to pay, a beneficiary’s creditors have the same right as the beneficiary.

Exception: A spendthrift restriction exists.

If the discretion to pay is not exercised, then the beneficiary’s interest cannot be reached by creditors.

Question 6

Does a beneficiary of a fully discretionary trust have standing to challenge trustee’s actions?

Answer 6

No unless there is a clear abuse of discretion

Question 7

What is a mandatory trust?

Answer 7

Trustee has no discretion; look to the trust document to see what trustee’s powers are.

Question 8

Spendthrift Trust

Answer 8

Expressly restricts beneficiary’s power to voluntarily or involuntarily transfer his/her equitable interest