Transferability of a Beneficial Interest

Question 1

Volutary Transfers

Answer 1

(1) A beneficiary may transfer or mortgage a beneficial interest in a trust whether it be an equitable fee or an equitable life interest, unless
a. the trust includes a valid restraint on transfer, OR
b. the beneficial interest is inherently incapable of transfer.
(2) Consideration is not required for a transfer of a beneficial interest in the trust to be effective, but there is only a promise to transfer which is unenforceable without consideration.
(3) Absent trust provisions to the contrary, the beneficiary does not have to give notice to or obtain the consent of the trustee in order to transfer the interest.

Question 2

Claims by creditors of beneficiary

Answer 2

To the extent that a beneficiary can voluntarily transfer the beneficial interest held under trust, the creditors of the beneficiary may claim against that interest

Question 3

1) Restraints on transfer

Answer 3

a. Indirect restraint—cessor clause: provides that if the beneficiary attempts to transfer the beneficial interest, the interest is lost and ceded to another person specified.
b. direct restraint—spendthrift clause: declares that any attempt to transfer the beneficial interest (interest OR principal) is ineffective
i. After distribution of assets to a beneficiary, the property is subject to debts of the beneficiary.
ii. Exception to enforcement: notwithstanding a spendthrift provision,\
1. if settlor is beneficiary spendthrift clause is ineffective in defeating claims of settlor’s creditors

2. a child may make a claim against the beneficiary’s interest in a trust for unpaid maintenance or support
   unless the trust is a special or supplemental needs trust.
3. SC law does not permit a claim by a former spouse seeking unpaid alimony or support.

Question 4

Inherent Non-Transferability of Beneficial Interest

Answer 4

(2) Inherent non-transferability of beneficial interest: the nature of a trust obligation may be so inherently inconsistent with transfer of the interest as to prevent the beneficiary from making such assignment voluntarily or involuntarily.
a. Support trusts: when a trustee is required to pay income or principal as necessary for a beneficiary’s support (if creditors provide necessaries, may be able to force payment)
b. Discretionary trusts: trustee is given authority to determine how much principal or income will be paid; transferee or creditor cannot compel exercise of that discretion in favor of a distribution.

Question 5

Mandatory Trust

Answer 5

(3) Mandatory trusts: trustee must pay a described amount to a particular beneficiary at set intervals; the beneficiary may bring an equitable action to require the trustee to make payments required under the trust document, and absent a spendthrift clause, such a trust may be vulnerable to creditor claims.

Question 6

Claims against trust property when settlor is not a

beneficiary

Answer 6

Revocable trusts

Creditors of a settlor of a revocable trust can reach the assets of the trust to pay the debts of the settlor at any time during the settlor’s life, or, after the settlor’s death, to the extent that probate assets are insufficient to pay the creditor. The reach of the creditor extends to any assets that could be reached by the settlor upon exercise of the
power to revoke.

Irrevocable trusts

Generally, the creditors of a settlor of an irrevocable trust cannot reach the assets of the trust to pay the debts of the settlor, unless the settlor is a beneficiary.