Right of Beneficiaries and Creditors to Distribution

Question 1

What are the types of trust distributions?

Answer 1

Mandatory Trusts

• Trustee has no discretion.
• “trustee to pay all income”…“trustee to do X each month”.

Discretionary Trusts

• Trustee has complete discretion as-to whether she will make distribution.
• “Trustee to make payments for health of X”…“trustee to make payments, in her discretion…”

Support Trusts
- Trustee makes distribution to support the beneficiary.

Question 2

What is the rule for alienability of trust property?

Answer 2

Rule 1

• A beneficiary’s equitable interest in trust property is freely alienable.
• Exception: Trust instrument or a statute limits this right.
• Creditors can reach beneficiary’s equitable interest.

Rule 2
- A creditor cannot reach trust principal or income until amounts become payable to the beneficiary or the beneficiary can demand it.

Question 3

What is the rule for asset protection trusts?

Answer 3

Support Trust

• Creditors cannot reach trust property, because the beneficiary cannot demand payment.
• Creditors can reach when the trustee makes a support payment.

Discretionary Trust

• Creditors cannot reach trust property, because the beneficiary cannot demand payment.
• Creditors can reach when trustee makes payment.

Spendthrift Trust

• Trust expressly restricts the beneficiary’s power to alienate her interest.
• Creditors cannot reach trust property until the trustee makes a payment.
• Exception: spousal or child support; Those providing basics to the beneficiary; holders of federal or state tax liens.