Spendthrift Trusts & Rights Of Creditors

Question 1

When is a spendthrift provision valid?

Answer 1

Only if it restrains both voluntary AND involuntary transfers

Question 2

What is a spendthrift interest?

Answer 2

Cannot be sold or assigned by the income beneficiary, nor may any creditors reach it (but creditor may attempt to collect directly from beneficiary after a payment is made from the trust)

Question 3

What are the 5 exceptions to the rule that creditors cannot reach property in spendthrift provision

Answer 3

1. A judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust;
2. A creditor who furnished necessities (I.e., necessary food, shelter, clothing, medical care)—only some jurisdictions recognize this exception;
3. An order for child support or alimony;
4. Any claim by state or federal government (I.e. federal tax liens); or
5. A self-settled trust where the settlor retains an interest (I.e. revocable trust)

Question 4

Do spendthrift trusts provide protection for mandatory distributions of trust property?

Answer 4

No

Question 5

Will a spendthrift provision protect a trustee who had abused his discretion in failing to make payments?

Answer 5

No; beneficiary may reach trust assets if abuse of discretion

Question 6

When may a court authorize a creditor to reach a beneficiary’s interest by attachment if present or future distributions to the beneficiary?

Answer 6

When the beneficiary’s interest is not subject to a spendthrift provision

Question 7

When may a creditor attempt to receive the trust property if a debtor who is a remainder beneficiary?

Answer 7

Must wait until the trust terminates

Question 8

Can a creditor compel a distribution to a beneficiary that is subject to the trustee’s discretion (whether or not a trust contains a spendthrift provision)?

Answer 8

No. Cannot compel distribution subject to trustee’s discretion even if

(a) the discretion is expressed in the form of a standard of distribution, OR
(b) the trustee has abused their discretion

Question 9

What may a court order if a judgment or order exists against the beneficiary for unpaid spousal or child support?

Answer 9

A distribution to satisfy the judgment and direct the trustee to pay the child, spouse, or former spouse an equitable amount of the judgment/order