RESTRAINTS ON ALINENATION

Question 1

Issues for RESTRAINTS ON ALINENATION

Answer 1

Spendthrift trusts
Support trusts
Discretionary trusts

Question 2

Ways of Alienation

Answer 2

The beneficiary of a private express trust can voluntarily
alienate his interest in property (transfer his right to future
payments), and creditors can involuntarily alienate a B’s
interest in property (attach or seize a beneficiary’s right to
future payments).

Question 3

Definition of a spendthrift trust:

Answer 3

Beneficiary cannot transfer his right to future payments of income or principle and creditors cannot attach the beneficiaries right to future payments of income or principal

Question 4

How to ID spendthrift trust:

Answer 4

The terms of the trust must essentially include the definition:

Example: “No beneficiary of this trust shall be allowed to
voluntarily transfer his right to future payments, and no creditor shall be allowed to attach any beneficiary’s right to future payments.”

The fact pattern must include the definition.

Question 5

Three testable issues on Spendthrift trusts:

Answer 5

1. Voluntary alienation
2. Involuntary Alienation:
3. Can the settlor ever create a spendthrift trust for himself or herself (create a self-settled spendthrift trust)?

Question 6

Voluntary alienation: Can the beneficiary ever voluntarily
alienate or transfer his right to future payments,
notwithstanding the spendthrift provisions?

Answer 6

[a] Answer: No, as a general rule.
[b] This would defeat the terms of the trust.
[c] But sometimes a court will recognize the assignment on the ground that the beneficiary merely has given the
trustee a direction or order to pay the beneficiary’s agent
or representative, i.e. the assignee. In such case, prior to
the time of payment, beneficiary would have the right to
revoke the order or direction.

Question 7

Involuntary Alienation: Can creditors ever attach the
beneficiary’s right to future payments, notwithstanding the
spendthrift provisions?

Answer 7

[a] Answer: No, as a general rule.
[b] Common law exceptions: Preferred creditors can attach the beneficiary’s right to future payments,
notwithstanding the spendthrift provisions. The key is
that they are not typical creditors.

In addition to these common law exceptions for preferred creditors, there is also the rule in many jurisdictions that any creditor (even if not a preferred creditor) has the right to attach “surplus,” as measured by the beneficiary’s “station in life.”

Question 8

Examples of common law preferred creditors:

Answer 8

1. Government creditors such as the IRS
2. Those who provide the necessities of life to the beneficiarry
3. A child for child support
4. Spousal Support
5. An ex-spouse for alimony
6. A tort judgment creditor.

Question 9

Can the settlor ever create a spendthrift trust for himself or herself (create a self-settled spendthrift trust)?
[a] As to involuntary alienation:

Answer 9

[i] In the overwhelming number of jurisdictions, the trust itself is valid, but the spendthrift provisions are not recognized. To recognize a self-settled spendthrift trust for the purpose of insulating oneself from one’s own creditors violates public policy.

[ii] In a few jurisdictions, however, a settlor is allowed to
create a spendthrift trust for himself, thus insulating
himself from his own creditors.

Question 10

Can the settlor ever create a spendthrift trust for himself or herself (create a self-settled spendthrift trust)?
[a] As to voluntary alienation:

Answer 10

There is a split of
authority:

[i] Most jurisdictions will ignore the provision
restricting voluntary alienation and allow the settlor to
voluntarily alienate her interest.

[ii] But some jurisdictions will not allow settlor to transfer her right to future payments; the rationale here is policy driven: that enforcement of the spendthrift provision protects the settlor/beneficiary from himself or herself.

Question 11

Definition of a support trust:

Answer 11

The trustee is required to use only so much of the income or principal as is necessary for the beneficiaries health, support, maintenance, or education

Question 12

Three testable issues on Support trusts:

Answer 12

1. Voluntary alienation:
2. Involuntary alienation
3. Can the settlor ever create a support trust for himself or herself (create a self-settled support trust)?

Question 13

Voluntary alienation: Can the beneficiary ever voluntarily
alienate or transfer his right to future payments,
notwithstanding the support trust provisions?

Answer 13

[a] Answer: No. Why? To allow any type of assignment
would defeat the purpose of the trust and violate settlor’s
intent.
[b] Thus, beneficiary cannot transfer his right to future
payments in a support trust.

Question 14

Involuntary alienation: Can creditors ever attach the
beneficiary’s right to future payments, notwithstanding the
support trust provisions?

Answer 14

Answer: See rules for spendthrift trusts: rules are the
same. (Generally no attachment. But there are preferred
creditors, who can attach the beneficiary’s right to future
payments.)

Question 15

Can the settlor ever create a support trust for himself or herself (create a self-settled support trust)?

Answer 15

There is a split of
authority:

[i] Most jurisdictions will ignore the provision
restricting voluntary alienation and allow the settlor to
voluntarily alienate her interest.

[ii] But some jurisdictions will not allow settlor to transfer her right to future payments; the rationale here is policy driven: that enforcement of the spendthrift provision protects the settlor/beneficiary from himself or herself.

Question 16

Discretionary Trusts

Answer 16

The trustee is given sole and absolute discretion in determining how much to pay the beneficiary if anything and when to pay the beneficiary, if ever

Question 17

Three testable issues on discretionary trusts:

Answer 17

1. Voluntary
2. Involuntary
3. Can settlor ever create a discretionary trust for herself?

Question 18

Voluntary alienation: Can beneficiary ever transfer his interest, his right to future payments, notwithstanding the discretionary trust provisions? This is what you should tell the bar examiners:

Answer 18

[a] On the one hand, no: Beneficiary cannot voluntarily
transfer his right to future payments because, the question may be asked, what exactly is the beneficiary assigning? The beneficiary may not get anything.

[b] But, on the other hand, if in fact there was an assignment, then the assignee steps into the shoes of the beneficiary. Because the beneficiary could not force payment by the trustee, neither can the assignee. However, if the trustee has notice of the assignment and does decide to pay, then the trustee must pay the assignee or be held personally liable.

Question 19

Involuntary alienation: Can creditors ever attach the
beneficiary’s right to future payments, notwithstanding the
discretionary trust provisions? This is what you should tell the bar examiners:

Answer 19

[a] On the one hand, creditors cannot attach the beneficiary’s right to future payments because there is nothing to attach. The trustee may never allocate anything to the beneficiary. The beneficiary could not force payment, and neither can the creditors. Thus, there is nothing to attach by the creditors.

[b] On the other hand, if the trustee has notice of the debt and the creditor’s judgment against the beneficiary, and the trustee does decide to pay, he must pay the creditors or be held personally liable.

Question 20

Can settlor ever create a discretionary trust for herself?

Answer 20

There is a split of
authority:

[i] Most jurisdictions will ignore the provision
restricting voluntary alienation and allow the settlor to
voluntarily alienate her interest.

[ii] But some jurisdictions will not allow settlor to transfer her right to future payments; the rationale here is policy driven: that enforcement of the spendthrift provision protects the settlor/beneficiary from himself or herself.