Transfer of Beneficiary's Interest; Creditors' Rights

Question 1

What is a spendthrift trust?

Answer 1

Precludes beneficiary from voluntarily or involuntarily transferring their interest in the trust, and creditors are precluded from reaching it
* Subject to exceptions

Question 2

What if a trust doesn’t have a spendthrift provision?

Answer 2

Beneficiary’s interest is as freely transferable as any legal interest would be, and can be reached by creditors

Question 3

What happens after distribution of principal or income to beneficiary?

Answer 3

Not protected by spendthrift
* Creditors must file lawsuit each time debtor-beneficiary receives distribution from trust

Question 4

What are the exceptions to the spendthrift protection?

Answer 4

Cannot be used to shield beneficiary from:
1. Their own creditors, when the beneficiary is settlor (unless in a qualified trust)
2. Claims for child support
3. Claims by the government

Question 5

What is a qualified self-settled spendthrift trust?

Answer 5

A spendthrift trust that protects the settlor himself from creditors–requirements:
1. Must be irrevocable and created during settlor’s lifetime
2. Must be at least one beneficiary other than settlor to whom distribution may be made
3. Trust must at all times have aqualified trustee
4. Trust instrument must expressly incorporate the laws of the Commonwealth
5. Trust must include spendthrift provision restraining voluntary and involuntary transfer of the settlor’s qualified interest
6. Settlor must not have right to disapprove distributions

Question 6

Discretionary Trust and Powers

Answer 6

If trustee has discretion, beneficiary does not have any “right” to income until trustee exercises power
* Beneficiary’s creditors cannot compel payment even in absence of spendthrift clause unless for: (1) support/maintenance; (2) necessaries furnished by creditor of support trust beneficiary; or (3) against settlor-beneficiary of a discretionary trust