FIFTH CONCEPT: RESTRAINTS ON ALINENATION

Question 1

Settlor creates a private express trust for beneficiary (“B”), which provides B is to receive all accrued interest income every December 31. At the end of this year, on December 31, we stipulate that B will receive $10,000. Around November, B needs money and cannot wait until December 31. B, therefore, goes to a money broker or a bank and transfers his interest (the right to receive $10,000 on December 31) to the bank for $5,000. Can B do this? What’s it called?

Answer 1

Yes, Property interests can be sold or transferred. This is what is known as voluntary alienation.

Question 2

Settlor creates a private express trust for beneficiary (“B”), which provides B is to receive all accrued interest income every December 31. B does not pay his bills, however. Creditors in
November want to seize all of the accrued interest. They don’t want to wait until B gets the money because once B gets the money, B will spend the money, leaving the creditors out of luck. Thus, the creditors want to attach the money owed directly from the trustee. Can they do it? What’s it called?

Answer 2

Yes. IT is called involuntary alienation.

Question 3

What must a creditor do to institute an involuntary alienation?

Answer 3

Go through proper legal proceedings.

Question 4

what is the definition of a spendthrift trust?

Answer 4

A trust where the beneficiary cannot transfer his right to future payments of income or principle and creditors cannot attach the beneficiary’s right to future income or principle.

Question 5

“No beneficiary of this trust shall be allowed to voluntarily transfer his right to future payments, and no creditor shall be allowed to attach any beneficiary’s right to future” What kind of trust is this?
payments.”

Answer 5

A spendthrift trust.

Question 6

Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding the spendthrift provisions?

Answer 6

Generally, no.

Question 7

under what circumstance will a trust be able to be voluntarily alienated?

Answer 7

when the court recognizes the assignment on
the ground that the beneficiary merely has given the
trustee a direction or order to pay the beneficiary’s agent or representative, i.e. the assignee. In such case, prior to the time of payment, beneficiary would have the right to revoke the order or direction.

Question 8

Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the spendthrift provisions?

Answer 8

Generally, no.

Question 9

What type of creditors can attach the beneficiary’s rights to future payments from spendthrift trusts?

Answer 9

Common law preferred creditors.

Question 10

What are a few examples of common law preferred creditors?

Answer 10

1. government creditors such as the IRS
2. those who provide the necessities of life to the beneficiary
3. a child for child support
4. a spouse for spousal support
5. an ex spouse for alimony
6. a tort judgment creditor.

Question 11

Beneficiary (“B”) negligently injures X. X can satisfy his judgment against B by proceeding against the trust and attach B’s right to future payments. Why?

Answer 11

When settlor created the spendthrift trust, it was to
insulate B from spending all of his money in one fell swoop. It was not for the purpose of insulating B from his negligent acts.

Question 12

When can a non-preferred creditor attach money from the spendthrift trust to the beneficiary?

Answer 12

In many jurisdictions, any creditor has the right to attach surplus as measured by the beneficiary’s station in life.

Question 13

Suppose beneficiary (“B”) needs $25,000 a year to live, to maintain her station in life, that is, her standard of living. Suppose also that the trust generates $75,000 of income for the B. What is the surplus?

Answer 13

50,000

Question 14

Is a station in life based on an objective test?

Answer 14

No, it is subjective. although only

reasonable amounts are considered. Thus, gambling expenses would not be considered.

Question 15

Can the settlor ever create a spendthrift trust for himself or herself? (as to involuntary alienation)

Answer 15

In the overwhelming number of jurisdictions, the trust itself is valid, but the spendthrift provisions are not recognized.
In a few jurisdiction he can and can insulate himself from creditors.

Question 16

Can the settlor ever create a spendthrift trust for himself or herself? (as to voluntary alienation)

Answer 16

There is a split of authority: [i] Most jurisdictions will ignore the provision restricting voluntary alienation and allow the settlor to voluntarily alienate her interest.
[ii] But some jurisdictions will not allow settlor to transfer her right to future payments; the rationale here is policy driven: that enforcement of the spendthrift provision protects the settlor/beneficiary from himself or herself.

Question 17

What is the definition of a support trust?

Answer 17

In a support trust, the trustee is required to use only so much of the income or principle as is necessary for the beneficiary’s health support, maintenance or education.

Question 18

“Trustee is required to use only so much of the
income or principal as is necessary for the beneficiary’s health, support, maintenance, and education.” What kind of trust is this?

Answer 18

A support trust.

Question 19

Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding the support trust provisions? Why or why not?

Answer 19

No. To allow any type of assignment

would defeat the purpose of the trust and violate settlor’s intent.

Question 20

Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the support trust provisions?

Answer 20

Generally no attachment. But there are preferred

creditors, who can attach the beneficiary’s right to future payments.

Question 21

Can the settlor ever create a support trust for himself or herself (create a self-settled support trust)?

Answer 21

There is a split of authority:
[i] Most jurisdictions will ignore the provision restricting voluntary alienation and allow the settlor to voluntarily alienate her interest.
[ii] But some jurisdictions will not allow settlor to transfer her right to future payments; the rationale here is policy driven: that enforcement of the support trust protects the settlor/beneficiary from himself or herself.

Question 22

Define a discretionary trust

Answer 22

The trustee is given sole and absolute discretion is determining how much to pay the beneficiary if anything, and when to pay the beneficiary if ever

Question 23

“Trustee shall have full, sole, and absolute discretion in determining when to pay the beneficiary and how much to pay the beneficiary.” Why kind of trust is this?

Answer 23

A discretionary trust.

Question 24

Can beneficiary ever transfer his interest, his right to future payments, notwithstanding the discretionary trust provisions?

Answer 24

On the one hand, no: Beneficiary cannot voluntarily
transfer his right to future payments because, The beneficiary may not get anything.

On the other hand, if in fact there was an assignment, then the assignee steps into the shoes of the beneficiary. Because the beneficiary could not force payment by the trustee, neither can the assignee. However, if the trustee has notice of the assignment and does decide to pay, then the trustee must pay the assignee or be held personally liable.

Question 25

Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the discretionary trust provisions?

Answer 25

On the one hand, creditors cannot attach the beneficiary’s right to future payments because there is nothing to attach. The trustee may never allocate anything to the beneficiary. The beneficiary could not force payment, and neither can the creditors. Thus, there is nothing to attach by the creditors.

On the other hand, if the trustee has notice of the debt and the creditor’s judgment against the beneficiary, and the trustee does decide to pay, he must pay the creditors or be held personally liable.

Question 26

Can settlor ever create a discretionary trust for herself?

Answer 26

There is a split of authority:
[i] Most jurisdictions will ignore the provision restricting voluntary alienation and allow the settlor to voluntarily alienate her interest.
[ii] But some jurisdictions will not allow settlor to transfer her right to future payments; the rationale here is policy driven: that enforcement of the discretionary trust protects the settlor/beneficiary from himself or herself.

Question 27

“Trustee in his sole and absolute discretion, shall pay the amount needed for the beneficiary’s support and maintenance.” What do you do with this?

Answer 27

Because of the words sole and absolute it could be a discretionary trust. Then apply rules of discretionary trusts to the facts.

Also, because of the word support and maintenance, in the alternative it could be a support trust. Then apply the rules of support trusts to the facts.