Spendthrift Trusts and creditor rights

Question 1

The default rule is …

Answer 1

against spendthrift protection but most well drafted trusts have a spendthrift provision

Question 2

Spendthrift trust

Answer 2

can protect beneficiary interests from creditor claims, but only if the beneficiary is not also the settlor

Question 3

How does a spendthrift trust work ?

Answer 3

It restrains the transfer of the beneficiary’s interest, which cannot be transferred voluntary

A creditor cannot reach an interest or distribution before it being received by the beneficiary

It must restrain both voluntary and involuntary transfers

Question 4

How to make a spendthrift trust ?

Answer 4

The trust instrument must contain spendthrift language, but language like “spendthrift trust” or similar words is sufficient

Question 5

Spendthrift provisions do not effect….

Answer 5

Exception creditors

Question 6

Who is an exception creditor ?

Answer 6

1. Beneficiary’s child who has a judgement or court order against the beneficiary for support
2. A judgement creditor who has provided services for the protection of the beneficiary’s trust interest (lawyer)
3. Government entities (U.S., VA, City/town/county)

Question 7

Overdue distributions

Answer 7

Spendthrift protection is not available for a mandatory distribution if the trustee has not made the distribution within a reasonable time after the designated distribution date

Question 8

Discretionary trusts

Answer 8

Distributions of trust property are subject to the trustee’s discretion, creditors generally cannot compel distributions.

However, creditors may seek garnishment of the beneficiary’s future and present distributions that when a discretionary distribution is made, it must be made to the creditor to the extent of the debt (rather than to the beneficiary)

Question 9

Special rule in discretionary trust for child support

Answer 9

Child support orders can be reached when the trustee has not complied with a standard or has abused discretion

Question 10

Creditors rights against settlor- revocable trust

Answer 10

During the settlors life, a creditor may reach assets in a revocable trust regardless if the settlor is a beneficiary.

The settlor is treated as the property owner because he holds the power to vest title in herself

After the settlor dies, the assets are subject to claims of the settlor’s benefit

Question 11

Creditor rights against settlor- Self settled irrevocable trust

Answer 11

Generally, a creditor of the settlor may reach the maximum amount that can be distributed to the or for the settlor’s benefit

Question 12

Exception to creditor rights against settlor- self settled irrevocable trust

Answer 12

The Qualified Self-settled spendthrift trusts (QSSST) - Settlors may enjoy spendthrift protection from self-settled trust if:

1. Trust is irrevocable
2. Trust incorporated VA law and contains a valid spendthrift provision
3. VA trustee independent from the settlor has sole discretion on distributing income, principal, or both to the settlor, and
4. At least one other beneficiary is entitled to receive income or principal or principal distributions through the settlor’s lifetime