RESTRAINTS ON ALINENATION Flashcards
Issues for RESTRAINTS ON ALINENATION
Spendthrift trusts
Support trusts
Discretionary trusts
Ways of Alienation
The beneficiary of a private express trust can voluntarily
alienate his interest in property (transfer his right to future
payments), and creditors can involuntarily alienate a B’s
interest in property (attach or seize a beneficiary’s right to
future payments).
Definition of a spendthrift trust:
Beneficiary cannot transfer his right to future payments of income or principle and creditors cannot attach the beneficiaries right to future payments of income or principal
How to ID spendthrift trust:
The terms of the trust must essentially include the definition:
Example: “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 payments.”
The fact pattern must include the definition.
Three testable issues on Spendthrift trusts:
- Voluntary alienation
- Involuntary Alienation:
- Can the settlor ever create a spendthrift trust for himself or herself (create a self-settled spendthrift trust)?
Voluntary alienation: Can the beneficiary ever voluntarily
alienate or transfer his right to future payments,
notwithstanding the spendthrift provisions?
[a] Answer: No, as a general rule.
[b] This would defeat the terms of the trust.
[c] But sometimes a court will recognize 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.
Involuntary Alienation: Can creditors ever attach the
beneficiary’s right to future payments, notwithstanding the
spendthrift provisions?
[a] Answer: No, as a general rule.
[b] Common law exceptions: Preferred creditors can attach the beneficiary’s right to future payments,
notwithstanding the spendthrift provisions. The key is
that they are not typical creditors.
In addition to these common law exceptions for preferred creditors, there is also the rule in many jurisdictions that any creditor (even if not a preferred creditor) has the right to attach “surplus,” as measured by the beneficiary’s “station in life.”
Examples of common law preferred creditors:
- Government creditors such as the IRS
- Those who provide the necessities of life to the beneficiarry
- A child for child support
- Spousal Support
- An ex-spouse for alimony
- A tort judgment creditor.
Can the settlor ever create a spendthrift trust for himself or herself (create a self-settled spendthrift trust)?
[a] As to involuntary alienation:
[i] In the overwhelming number of jurisdictions, the trust itself is valid, but the spendthrift provisions are not recognized. To recognize a self-settled spendthrift trust for the purpose of insulating oneself from one’s own creditors violates public policy.
[ii] In a few jurisdictions, however, a settlor is allowed to
create a spendthrift trust for himself, thus insulating
himself from his own creditors.
Can the settlor ever create a spendthrift trust for himself or herself (create a self-settled spendthrift trust)?
[a] As to voluntary alienation:
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.
Definition of a support trust:
The trustee is required to use only so much of the income or principal as is necessary for the beneficiaries health, support, maintenance, or education
Three testable issues on Support trusts:
- Voluntary alienation:
- Involuntary alienation
- Can the settlor ever create a support trust for himself or herself (create a self-settled support trust)?
Voluntary alienation: Can the beneficiary ever voluntarily
alienate or transfer his right to future payments,
notwithstanding the support trust provisions?
[a] Answer: No. Why? To allow any type of assignment
would defeat the purpose of the trust and violate settlor’s
intent.
[b] Thus, beneficiary cannot transfer his right to future
payments in a support trust.
Involuntary alienation: Can creditors ever attach the
beneficiary’s right to future payments, notwithstanding the
support trust provisions?
Answer: See rules for spendthrift trusts: rules are the
same. (Generally no attachment. But there are preferred
creditors, who can attach the beneficiary’s right to future
payments.)
Can the settlor ever create a support trust for himself or herself (create a self-settled support trust)?
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.