Trusts - Creditors' Claims and Spendthrift Trusts Flashcards
Can a trust beneficiary’s interest be reached by beneficiary’s creditors?
Yes, its freely transferable unless the trust contains a spendthrift clause prohibiting transfer of the beneficiary’s interest.
When are spendthrift clauses NOT valid?
Generally valid except:
(1) Contracts for necessaries (medical, food, rent) - helps persons obtain these services
(2) Alimony, Child Support obligations
(3) Any interest retained by the Settlor
* 3A Revocable trust - settlor is treated as “owner” for creditors’ rights purposes
(4) Federal Tax Liens
Does a spendthift clause protect interest retained by the settlor?
No spendthrift protection
What is the no-self dealing rule?
Do not want trustee’s personal interest in the transaction to taint his judgment…
Trustee cannot buy or sell trust assets to himself.
Trustee cannot borrow trust fund
Trustee cannot loan funds to the trust
Trustee cannot profit from serving as trustee (except for being compensated) as by taking advantage of confidential information received in his capacity as trustee.
Corporate trustee cannot buy its own stock as a trust investment
Self dealing rules can be waived by the settlor
What is the SoL for Self-Dealing?
SoL does not begin to run on any action against a fiduciary unless and until he:
(1) “repudiates the trust” [denies the existence of a trust with respect to the property
(2) dies or resigns; or
(3) gives an accounting that makes full disclosure of the facts upon which the action is based.
What options exist if a trustee breaches any fiduciary duty?
Beneficiary can bring an action to remove the trustee plus:
(i) Beneficiary can ratify the transaction and waive the breach.
(ii) He can bring the surcharge action for resulting loss. For self-dealing cases, breach of fiduciary duty is automatic - only thing to do is measure of damages.
Are exculpatory clauses (immunizing trustee’s from liability) valid?
Yes even though it exculpates trustee from liability for ordinary negligence. But unenforcable if exculpates for bad faith, gross negligence, or fraud.
