Transfer of the Beneficiary's Interest Flashcards
What is a Discretionary Trust, a Spendthrift Trust, and a Support Trust?
Discretionary Trust: In a discretionary trust, the trustee is given discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary.
Spendthrift Trust: A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust. In other words, he cannot sell or give away his right to future income or capital, and his creditors are unable to collect or attach such rights.
Support Trust: A support trust directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support.
What are a Creditors rights when dealing with a Discretionary Trust?
Before Trustee Exercises Discretion — Beneficiary’s interest is not assignable and cannot be reached by their creditors
- Creditors are usually allowed to attach the beneficiary’s interest but may not compel the trustee to make a distribution.
After Trustee Exercises Discretion — If the trustee has notice of an attachment by creditors and decides to make payments to the beneficiary, the trustee must make those payments directly to the creditors unless the beneficiary’s interest is protected by a spendthrift provision.
When can a Creditor force a trustee of a Discretionary Trust to satisfy a judgment BEFORE the trustee exercises discretion?
The court can force the trustee of a Discretionary Trust to satisfy a judgment or order against the beneficiary for the support or maintenance of the beneficiary’s child, spouse, or former spouse.
When is a Spendthrift Trust invalid?
1) Restraint on Involuntary Alienation Only: A restriction permitting the beneficiary to voluntarily alienate their interest, but purporting to deny creditors the right to reach the beneficiary’s interest, is probably invalid.
2) Settlor is Beneficiary: In most states, a settlor cannot use a spendthrift trust to protect their own property from their own creditors.
3) Ineffective Against Certain Creditors — Typically, a spendthrift clause cannot be used to shield the beneficiary from:
- Judgments or court orders for support or maintenance of the beneficiary’s child, spouse, or former spouse
- Claims by the government
True or False: A support trust can be mandatory or discretionary.
True. A support trust can be mandatory or discretionary.
- If discretionary, the creditors’ rights are the same as they are for other discretionary trusts.
Is a support trust assignable?
No. Support Trusts are NOT assignable, only the beneficiary can enjoy it.
