Statutory Spendthrift Rule and Protection from Creditors

Question 1

What does a spendthrift trust do?

Answer 1

• Protects a trust beneficiary’s interest from creditors by prohibiting voluntary or involuntary transfer of the beneficiary’s interest in the trust.
• In other words, prevents either the beneficiary OR his creditors from making the beneficiary’s interest alienable
• NOTE: only protects the interest, protection ends the moment trust money is paid out to the beneficiary

Question 2

How is NY different from the majority?

Answer 2

NY’s rule is very different. NY has a special statutory rule that protects all INCOME interests in trusts w/ spendthrift protection EVEN IF THERE IS NO SPENDTHRIFT CLAUSE, while in a majority of states spendthrift protection only attaches where there is an express spendthrift clause.

Question 3

How does the remainder beneficiary (person who gets the principal) get spendthrift protection?

Answer 3

Spendthrift clause must be expressly stated in the trust.

Question 4

Typical spendthrift clause language . . .

Answer 4

“No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiary’s creditors by attachment, garnishment, or other legal process”

Question 5

5 Major Exceptions to Spendthrift Protection

Answer 5

1- creditors who furnish necessities
2- child support and alimony
3- federal tax liens
4- 10% levy provided by CPLR (all creditors share in this levy; it is not 10%/creditor)
5- excess income beyond that needed for support and education [must show all other possible remedies have been exhausted; what is needed for support is based on the life style of the beneficiary]

Question 6

Self-Settled Trust Rule as a big limitation on spendthrift protection

Answer 6

• spendthrift protection does not apply to any interest retained by the SETTLOR
• settlors cant hide from their own creditors, but they can protect other beneficiaries
• ALL REVOCABLE TRUSTS are fair game for settlor’s creditors; even if the settlor has no immediate financial interest in the trust, but settlor retained the power to revoke, then the trust offers no protection against creditors of the settlor