Trusts - Transfer of Beneficiaries' Interests Flashcards
Transfer of Beneficiary’s Interest
Equitable interest is presumed freely transferrable during life by gift, sale, etc.
However, this free transferrability that is presumed is rarely the reality because of SPENDTHRIFT provisions or trust interests that are typically only life interests or require survival up to a particular point in time.
Discretionary Trust
Trustee determines how much beneficiary receives.
Beneficiary has nothing to transfer until trustee makes payment.
Nothing for creditor to reach until trustee makes a payment of some sort. All the beneficiary has is an expectancy. So there would be nothing for creditors to attach or beneficiaries to transfer.
Spendthrift Trust
Commonly tested because virtually every trust created contains a spendthrift clause.
2 prongs of spendthrift provision:
1) beneficiary may not transfer interest. Any attempt is ineffective because beneficiary doesn’t have that stick of the property right to transfer the property. But once the trustee pays the beneficiary, they can do whatever it is. Many trusts have it paid “to the benefit of the beneficiary” and directly pay rent, tuition, etc instead.
2) Creditors can’t attach. But once the beneficiary gets paid, then they can attach. That’s why, to counteract that, you have most spendthrift provisions direct the trustee to DIRECTLY PAY the expenses of the beneficiary like paying the landlord for rent, paying the hospital for medical bills, etc.
Limitations:
1) Biggest limit is that they’re ineffective if the settlor is a beneficiary. That would be a “self-settled spendthrift trust”. You can’t use it to protect your own property. That would be fraudulent. Your own creditors would have had a right to your property. There are a growing number of states that now allow self-settled spendthrift trusts though to compete with the Bahamas. Majority rule still disallows them though.
Common Exceptions to Spendthrift Protection:
1) Support of spouse or child can reach spendthrift trust
2) Creditors who supply necessaries
3) Tort creditors (because they don’t investigate the credit of a person committing a tort against them)
Support Trust
A support provision means the use of trust is restricted to HEMS:
Health
Education
Maintenance
Support
Support trusts can be MANDATORY: trustee must use it for support, or DISCRETIONARY: if any spending is done by trustee, must be for support.
How much support is “support”? If it doesn’t say, it’s the person’s “accustomed standard of living” prior to becoming a beneficiary.
Do we consider the beneficiary’s other resources? How? Do we first say the beneficiary must use all their money and only if short does the trust kick in? Or does trust provide all support costs and if beneficiary has other funds that’s extra bonus? The trust instrument should deal with this expressly. If trust instrument doesn’t say what to do, courts examine on case by case basis.
A revocable trust provides that all income will be paid to Andy for life, and on his death, the trust corpus will be distributed to Betsy.
In the absence of language in the trust instrument to the contrary, which interests may be reached by Andy’s creditors?
The income of the trust.
A creditor reaches only the interest the debtor has, not the trust property itself. Andy’s creditors can reach his income in the trust, and could even sell it to satisfy their claims. Andy’s creditors can reach his interest before and after the income is paid.
