Reach of Creditors/Alienability

Question 1

Can a beneficiary alienate their interest in trust property?

Answer 1

Yes, freely unless a statute or the trust instrument says otherwise. Transferee takes identical interest.

Question 2

Can a beneficiary be forced to alienate their equitable interest in a trust?

Answer 2

Yes, it is reachable by creditors of the beneficiary to the extent it is reachable by the beneficiary itself, UNLESS statute or trust instrument provides otherwise.

Question 3

Can creditors go after a beneficiary’s principal or income from the trust?

Answer 3

Not until they become payable to the beneficiary or are subject to her demand.

Question 4

What types of trusts block or limit a creditor’s rights to claims?

Answer 4

“Asset-protection” trusts

1. Pour-over trusts
2. Support trusts
3. Discretionary trusts
4. Spendthrift trusts

Question 5

What is a pour-over trust?

Answer 5

A trust that takes assets as designated under a will.

Question 6

When can creditors reach the assets of a pour-over trust?

Answer 6

Only if the trust was not executed before or simultaneously with the will. (Otherwise, the pour-over trust fails.)

Question 7

What is a support trust?

Answer 7

A trust that directs the trustee to pay income or principal out of the trust as necessary to support the beneficiary.

Question 8

When can creditors reach the assets of a support trust?

Answer 8

Only if they are a provider of a necessity to the beneficiary, in which case the provider (creditor) can be paid directly by the trustee.

Question 9

What is a discretionary trust?

Answer 9

A trust that gives the trustee complete discretion regarding whether to apply payments of income or principal to the beneficiary during the trust.

Question 10

When can a creditor reach the assets of a discretionary trust?

Answer 10

Only if

• the trustee exercised his discretion to pay AND there is no spendthrift restriction OR
• payment is required to satisfy judgments in favor of the beneficiary’s spouse, former spouse, or children.

Question 11

What is a spendthrift trust?

Answer 11

A trust that expressly restricts the beneficiary’s power to voluntarily or involuntarily alienate his equitable interest.

Question 12

When does a spendthrift restriction apply?

Answer 12

Only as long as the property remains in the trust.

Question 13

When can creditors reach the assets of a spendthrift trust?

Answer 13

Only

• once the property has been paid out,
• if the creditor is a child or spouse entitled to support,
• if the creditor is a person providing basic necessities to the beneficiary; OR
• if the creditor is a holder of federal or state tax leins.

Question 14

When can a creditor against the settlor reach the trust property?

Answer 14

1. If the settlor is alive and the trust is revocable.
2. If the settlor is alive and the trust is irrevocable, then only to the extent that it can be distributed to or for the benefit of the settlor.