Transfer of Interest

Question 1

Transfer of Interest?

Answer 1

Voluntary alienation: Interest may be freely transferrable by the beneficiary

Involuntary alienation: and/or may be subject to claims of the beneficiary’s creditors subject to limiting trust provisions.

Question 2

Spendthrift trust

Answer 2

Expressly restricts the B’s power to voluntarily or involuntarily transfer his equitable interest. S provisions are often inserted into trusts to protect beneficiaries from their own imprudence.

A beneficiary’s creditors usually cannot reach the B’s trust interest in satisfaction of their claims if the governing instrument contains a spendthrift clause prohibiting a beneficiary’s creditors from attaching the beneficiary’s interest.

To be valid: must apply to both voluntary and involuntary transfers of interest.

Question 3

Discretionary Trust

Answer 3

Grants absolute discretion to trustee to make distributions as sees fit. The B, his assignee, not his creditors can compel payment.

Question 4

Support Trust

Answer 4

Directs the trustee to pay only as is necessary for the beneficiary’s support. Voluntary and involuntary alienation are both prohibited (unless “preferred” creditor)

Question 5

Rights and Limitations of Creditors

Answer 5

Court may authorize a creditor to reach a B’s interest by attaching a present or future distributions to B as long as the interest is not subject to a spendthrift provision.

A creditor cannot compel distribution to a beneficiary if subject to the trustee’s discretion.

Question 6

Spendthrift clause exceptions

Answer 6

While spendthrift clauses are generally valid, most states allow certain classes of creditors to reach a beneficiary’s assets, notwithstanding the spendthrift clause.

The spendthrift clause exception applies to
(1) children and spouses entitled to support
(ii) those providing basic necessities to the beneficiary
(3) holders of federal or state tax liens.