Transfer of Beneficiary's Interest

Question 1

Transfer of Beneficiary’s Interests - General Concept

Answer 1

• presume beneficiary’s interest is freely transferable
• BUT settlor can impose restraints

Question 2

Beneficiary - Voluntary Transfer of Interests

Answer 2

• ex: gifts + sales
• allowed absent restrictions by statute or trust instrument
• the assigned interest remains subject to all previous conditions and limitations

Question 3

Involuntary Transfers of Beneficiary’s Interest

Answer 3

• CREDITORS
• unless statute or trust provides otherwise, beneficiary’s creditors CAN reach the beneficiary’s interest in the trust
• interest is subject to judicial sale
  -> to avoid a judicial sale, court may order trustee to pay beneficiary’s income to creditors until debt is satisfied

Question 4

Discretionary Trusts

Answer 4

-kind of trust in which trustee given discretion whether to apply or withhold payments of income or principal to a beneficiary

Question 5

Discretionary Trusts - Creditors’ Rights

Answer 5

• in a discretionary trust, before the trustee exercises their discretion to make payments to the beneficiary, the beneficiary’s interest is not assignable + cannot be reached by their creditors
  -> b/c until discretion exercised, beneficiary has nothing to transfer and no interest for creditors to reach
• creditors are usually allowed to attach beneficiary’s interest but can’t compel trustee to make a distribution
  -> if trustee has notice of an attachment by creditors + decides to make payments to the beneficiary, the trustee has to make the payments directly to the creditors unless the beneficiary’s interest is protected by a spendthrift provision

Question 6

Discretionary Trust - Special Rule for Claims of Child, Spouse, or Former Spouse

Answer 6

• court can force trustee to satisfy a judgment or order against the beneficiary for support or maintenance of beneficiary’s child, spouse, or former spouse

Question 7

Discretionary Trust - Beneficiary’s Rights

Answer 7

• beneficiary has no right of payment that they can enforce against the trustee
• beneficiary cannot interfere with the exercise of the trustee’s discretion unless trustee abuses their power, in which case court will intervene

Question 8

Spendthrift Trust - Basic Concept

Answer 8

• precludes beneficiary from voluntarily or involuntarily transferring their interest in the trust
• beneficiary’s creditors are precluded from reaching it to satisfy their claims
• technically a restraint on alienation, but most courts uphold

Question 9

Characteristics of Spendthrift Trust

Answer 9

• beneficiary may not transfer their interest
  -> can transfer any property received though once trustee pays
• creditors cannot attach beneficiary’s interest
  -> can’t reach beneficiary’s interest at all until income or principal has been paid to the beneficiary
  -> can reach any property paid to beneficiary though

Question 10

Spendthrift Trust - Restraint on Involuntary Alienation Only

Answer 10

• INVALID
• basically, you can’t set up a trusti n which the beneficiary would be able to voluntarily alienate their interest without letting creditors have access to it

Question 11

Effect of Spendthrift Clause

Answer 11

• assignments are unenforceable
• beneficiary’s assignees can’t force the trust to pay them directly
• trustee can choose to honor purported assignments, BUT can decide to pay beneficiary directly instead at any time, and beneficiary can withdraw their direction to pay the assignee

Question 12

Limitations on Spendthrift Clauses

Answer 12

• ineffective if settlor is beneficiary (though self-settled spendthrift trusts are allowed in a growing number of states)
  -> if unclear whether beneficiary = settlor, look at who furnished consideration for the creation of the trust (if you furnished the consideration, you’re the settlor even if the trust was created by another)
• ineffective against certain creditors:
  ->can’t be used to shield beneficiary from orders for support or maintenance of child, spouse or former spouse
  -> ineffective against claims by gov

Question 13

Support Trusts

Answer 13

• kind of trust in which use of property limited to beneficiary’s support
• directs trustee to pay only so much of the income or principal (or both) as is necessary for beneficiary’s support - can be mandatory or discretionary

Question 14

Support Trusts - Assignment

Answer 14

• NO assignments allowed
• even w/o spendthrift clause, beneficiary’s interest in support trust is such that no one but beneficiary can enjoy it
  -> beneficiary’s interest is not assignable by definition
• impliedly spendthrift

Question 15

Support Trusts - Standard of Support

Answer 15

• if instrument is silent, the standard of support is the beneficiary’s accustomed standard of living
• whether the beneficiary’s other income or resources should be taken into account is a question of settlor’s intent + decided by courts on a case-by-case basis

Question 16

Support Trust - Exam Tip

Answer 16

• a trust “to pay all of the income to A for his support” is NOT a support trust
  -> when the whole of the income is to be paid to A for his support, the words “for his support” merely state the motive for the transfer
• in such a case, A is not limited to amounts necessary for support

Question 17

Creditors of Trustee

Answer 17

• CAN’T reach trust property to satisfy their claims
• they only have a personal claim against the trustee