Transfers of the Beneficiary's Interest

Question 1

Transfers

Answer 1

A beneficiary may generally freely transfer their interest in the trust.

Unless statute or trust provides otherwise, the beneficiary’s creditors may reach the beneficiary’s interest.

Question 2

Discretionary Trust

Answer 2

The trustee is given discretion whether to apply or withhold payments of income or principal to a beneficiary.

Before the trustee exercises their discretion to make payments to beneficiary, the beneficiary’s interest is not assignable and cannot be reached by creditors. Creditors can attach to interest, but cannot compel distribution.

Question 3

Discretionary trusts and beneficiary’s rights

Answer 3

The beneficiary cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses their power in which case, the court will intervene.

Question 4

Spendthrift Trusts

Answer 4

A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interest, and beneficiary’s creditors are precluded from reaching it to satisfy claims.

Question 5

Spendthrift Trusts – Characteristics

Answer 5

1. Beneficiary may not transfer their interest
2. Creditors cannot attach to the beneficiary’s interest

You need both! A permission on alienation but denial of creditors is probably invalid.

Ineffective if the settlor is the beneficiary.

Ineffective to shield from judgments or court orders, or claims by the government

Question 6

DAPT

Answer 6

Domestic asset protection trust (self-settled spendthrift trust) is allowed in a growing number of states, but often not allowed.

Question 7

Support Trusts

Answer 7

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. A support trust may be mandatory or discretionary. Creditors can attach.

Support trusts are not assignable.

Standard of support is the beneficiary’s accustomed standard of living.