Transfers of beneficiary's interest

Question 1

Alienability

Answer 1

1. beneficiaries are generally free to transfer their trust interests
   i. voluntary alienation: agreeing or contracting to give interest in future payments from trust (assignment of future interest)
   ii. involuntary alienation: creditors who attach the (undistributed) trust interest
2. any assigned (transferred) interest remains subject to all previous conditions and limitations

Question 2

Spendthrift trusts (restraints on alienation)

Answer 2

1. spendthrift trust: a valid restraint on alienation in a private express trust
   i. beneficiary is not able to voluntarily or involuntarily transfer their interest in the trust
   a. applies both to interest in future income or principal
   ii. creditors cannot reach into the trust to satisfy their claims (by attaching the interest)
2. invalid if the settlor is the beneficiary
   i. cannot use a spendthrift trust for creditor protection
   ii. the trust is valid, but the spendthrift provision is not valid
3. creditors cannot reach into the trust funds until the are paid to the beneficiary
   i. certain classes of creditors are excepted (see below)
4. notes:
   i. beneficiary’s assignees cannot force a trustee to pay them
   ii. a restraint that allows beneficiary to voluntarily alienate their interest, while denying creditors, would be invalid

Question 3

Spendthrift trusts - testable issues

Answer 3

i. no voluntary alienation
a. exception: court may recognize assignments that are directions or orders to pay the beneficiary’s agent or representative (can be revoked before payment)

ii. no involuntary alienation
a. additional common law exceptions: preferred creditors can attach
i) dependents
ii) providers of necessities
iii) government
iv) children for child support
v) spouses for spousal support
vi) ex-spouse for alimony
vii) tort creditors (bc spendthrift trust is to insulate against spendthrift ways, not negligence)
b. some jxs: creditors have a right to attach surplus as measured by beneficiary’s station in life
i) surplus: amount over the standard of living
ii) station in life: standard of living, determined subjectively

Question 4

Discretionary trusts

Answer 4

1. trustee has discretion on whether to apply or withhold payments of income or principal to a beneficiary
   i. beneficiary’s interest cannot be assigned
   ii. beneficiary has no right to payment, and cannot compel trustee to make distributions
   iii. beneficiary can sue for abuse of power
2. creditors cannot reach undistributed interests
   i. creditors can attach the beneficiary’s interest
   ii. if trustee notices an attached interest, trustee must pay creditors directly, unless spendthrift provision exists
3. trustee has sole and absolute discretion on if any payments and what amount
   i. not merely a restraint on alienation on beneficiary

ii. voluntary alienation:
a. beneficiary cannot transfer right to future payments, because beneficiary has no such rights
b. nevertheless, if there is an assignment, assignee steps into beneficiary’s shoes
c. if trustee has notice of the assignment and decides to pay, must pay assignee or be held personally liable

iii. involuntary alienation
a. creditors cannot attach the right to future payment bc nothing to attach
b. nevertheless, if there is an attachment and trustee notices an attached interest, trustee must pay creditors directly, unless spendthrift provision exists

iv. no self-support trusts (trust where settlor is beneficiary)

Question 5

Support trusts

Answer 5

1. trust directing trustee to use only so much of the principal and income as is necessary for beneficiary’s support, health, maintenance, or education
   i. question of intent whether the beneficiary’s other resources should be considered in determining amounts payable
2. beneficiary’s interest cannot be assigned or reached by creditors
3. testable issues
   i. no voluntary alienation or assignment of right to future payments
   ii. involuntary alienation: see spendthrift rules
   iii. no self-support trusts (trust where settlor is beneficiary)