Transferring the Beneficiary's Interest Flashcards
May the beneficiary transfer their interest in the trust?
Absent statutory restrictions or restrictions in the trust interest, the beneficiary may freely transfer their interest, which will remain subject to all previous conditions and limitations
What are the rights of creditors to an insolvent beneficiary’s beneficial interest?
Absent statutory/instrument restrictions, an insolvent beneficiary’s creditors may levy on the interest, which is subject to judicial sale. The court may, alternatively, order the trustee to pay the income directly to the creditors
What is a spendthrift trust?
A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring the trust interest and the creditors cannot reach it to satisfy claims. These exist to protect a beneficiary from their own improvidence and is upheld usually despite being a restraint on alienation.
Can a spendthrift trust beneficiary’s creditor’s reach their interest?
Not until the income has been paid
Are restraints on involuntary alienation only in a spendthrift trust valid?
A restraint that only denies creditors the right to reach the interest but allows the beneficiary to transfer it freely is likely invalid.
What is the effect of spendthrift clause on assignments of the beneficial interest?
An assignee has no power to make the trustee pay them, but the trustee may honor it. A trustee may recommend payment to the beneficiary at any time and the beneficiary may with draw direction to pay the assignee.
What can a spendthrift clause not be used to shield the beneficiary from?
(1) His own creditors if he is also the settlor
(2) Judgments or court orders for child or spousal support
(3) claims by the government
How do you determine whether the beneficiary is also the settlor?
Determine who furnished the consideration for the creation of the trust. A person who furnishes consideration is the settlor even if the trust was created by another person.
What is a discretionary trust?
The trustee has discretion over whether to apply or withhold payments of income or principal to the beneficiary
What are creditors’ rights in a discretionary trust?
The beneficiary’s interest in a discretionary trust is not assignable and cannot be reached by creditors until the trustee exercises their discretion to make a payment to the beneficiary. Creditors may attach the interest but cannot compel a distribution. After attachment, the creditor will usually make the payment directly to the creditors unless there is a spendthrift provision.
What can a court force a discretionary trustee to pay out for?
A court can force the trustee to satisfy the judgment for child or spousal support.
Can the beneficiary of a discretionary trust enforce a right to payment?
No. A court will only intervene where the trustee abuses their power.
What is a support trust?
A support directs the trustee to pay only so much of the income/principal as necessary for the beneficiary’s support. This is a discretionary trust with a support standard.
What are the creditor’s rights in a support trust?
Same as discretionary trust
Are rights in a support trust assignable?
No, even if there is no spendthrift clause
