Creditor's Claims and Spendthrift Trusts Flashcards
Can trusts be used or set up in such a way as to keep money from creditors?
With respect to creditors of the settlor, the answer is generally no.
With respect to creditors of the beneficiary, they might be able to get a court order requiring that any payouts intended for the beneficiary go to them instead
For post-death purposes, where must creditors first seek payment from?
The probate estate
Post-death, if the probate estate is insufficient to satisfy a creditor, where else may creditors reach?
Can reach any assets that are the subject of non-probate transfers to the extent the settlor had enough control over them before dying that she could have used them for her own benefit
Spendthrift Provision
Like other trusts except that the settlor has added a clause to the trust instrument that seeks to restrict the ability of beneficiaries’ creditors from reaching the trust assets, be it income or corpus
What is the “corpus”?
The corpus of a trust is the sum of money or property that is set aside to produce income for a named beneficiary.
In the law of estates, the corpus of an estate is the amount of property left when an individual dies.
What might a spendthrift provision look like?
“No interest of any beneficiary shall be assignable by the beneficiary or subject to the claims of the beneficiary’s creditors by garnishment, attachment, or other legal process.”
What are the public policy exceptions to spendthrift trusts? (aka when can a court impose an attachment on distributions to beneficiaries?)
a. To secure payment of child support obligations;
b. To pay a lawyer who has provided legal services for the protection of a beneficiary’s interest;
c. To satisfy claims of the U.S. govt, Commonwealth, or a county, city, or town;
d. To satisfy claims of a state welfare agency seeking reimbursement for public assistance paid, including medical assistance, and;
e. For any creditor, if the trust instrument directs mandatory distribution of income or principal and the trustee has not made a distribution within a reasonable time
When may debtors establish an inter vivos spendthrift trust partly for self benefit that will effectively isolate the assets placed in the trust from creditors?
Only if the trust meets the following qualifications:
(1) the trust must be irrevocable;
(2) transfer of assets to the trust must not make the settlor insolvent;
(3) trust instrument must contain a spendthrift clause;
(4) the trustee must be legally authorized to participate in trust business and management in the Commonwealth;
(5) at all times when distributions may be made to the settlor there must be at least one other beneficiary to whom distributions may be made; and
(6) the settlor must not have a right to disapprove of trust distributions
Are specific words/phrases necessary to create a spendthrift trust?
No
