Creditor's Rights

Question 1

If a trust does not contain a spendthrift provision, the interest is…

Answer 1

freely transferrable and may be reached by creditors.

Question 2

A spendthrift trust precludes a beneficiary from…

Answer 2

voluntarily or involuntarily transferring their interest in the trust, and their creditors are precluded from reaching it to satisfy any claims.

Question 3

As exceptions, spendthrift clauses cannot be used to shield beneficiaries from…

Answer 3

claims for child support or claims by the government.

Question 4

Virginia now recognizes certain self-settled spendthrift trusts for qualified interests. To create a valid self-settled spendthrift trust…

Answer 4

1. The trust must be irrevocable and inter vivos;
2. There must be at least 1 additional beneficiary;
3. The trust must have at least 1 qualified trustee at all times;
4. The instrument must expressly incorporate the laws of VA;
5. The instrument must include a spendthrift provision; and
6. The settlor must not have the right to disapprove distributions from the trust.

Question 5

A qualified interest means…

Answer 5

a settlor’s interest in the sole discretion of an independent qualified trustee.

(to the extent that the settlor is entitled to receive distributions)

Question 6

A qualified trustee is one who…

Answer 6

is not, and whose actions are not subject to the direction of the settlor.

Question 7

A settlor’s transfer to a qualified self-settled spendthrift trust may…

Answer 7

be set aside if the transfer renders the settlor insolvent.

Question 8

If a trust is revocable, creditors can reach…

Answer 8

the entire trust property, even if the trust contains a spendthrift provision.

Question 9

A discretionary trust is one where…

Answer 9

the trustee has absolute discretion to distribute at any time, under their judgment.

Question 10

Discretionary trusts may only be reached by creditors for the purposes of:

Answer 10

1. Support & maintenance of the beneficiary’s child;
2. For necessities furnished by a creditor of a support trust beneficiary; or
3. Against a settlor-beneficiary of a discretionary trust.

Question 11

The HEMS standard is almost always implied in spendthrift provisions and supports beneficiary’s…

Answer 11

health, education, maintenance, and support to the extent of the level they were already accustomed to prior to the trust & based on the resources available to them.