Restraints on Alienation Flashcards
Voluntary Alienation
Absent restrictions by statute or the trust instrument, beneficiary may FREELY transfer his interest in the trust
Involuntary Alienation
Absent restrictions by statute or by the trust instrument, an insolvent trust beneficiary’s creditors may attach themselves to the future payments
Spendthrift Trust Generally
Precludes beneficiary from voluntarily or involuntarily transferring his interest in the trust, and his creditors are precluded from reaching it to satisfy their claims
Trust must include some definition resembling spendthrift. Fact patter on essay must include the clause
Rights of Creditors when Spendthrift Clause and Exceptions
beneficiary’s creditors CANNOT reach his interest until income has been paid to him
Exception: preferred creditors can attach the beneficiary’s right to future payments, notwithstanding the spendthrift (government creditors such as the IRS, child support, spousal support, alimony, those who provide necessities of life, tort judgment creditor)
Rights of beneficiary’s when Spendthrift Clause
Generally can’t voluntarily alienate their right if spendthrift clause is present
HOWEVER, beneficiary may assign the right b/c merely just a direction to the trustee to pay beneficiary’s agent (the assignee).
NOTE: beneficiary retains the right to revoke the order or direction before payment
Surplus and Station in Life
Another exception to general rule that creditor’s may not attach to beneficiary if spendthrift
Station in life: standard of living (subjective); surplus: amount trust generates above station in life
in many J*, surplus can be attached by ANY CREDITOR, not just preferred
Settlor as Beneficiary with Spendthrift Clause
Spendthrift provision is invalid if settlor is the beneficiary
Rationale: settlor can’t protect his own retained interests from his creditors
If unclear if settlor is the beneficiary, determine who furnished the consideration for the creation of the trust. If furnished, he is the settlor even if the trust is actually created by another person
Support Trust
Directs the trustee to pay only so much of the income or principal (or both) as necessary for the beneficiary’s health, support, maintenance, or education (HEMS)
Trust must include this definition (will be in the fact pattern if tested)
Voluntary alienation: beneficiary not allowed to assign their interest. Would defeat the purpose.
Involuntary alienation: Generally, no. Exception for preferred creditors.
Discretionary Trusts
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
Trust must include discretionary terms. Fact pattern will include it if tested
Voluntary alienation in discretionary trusts
Verbatim say this:
“On one hand, no. Can’t voluntarily transfer future payments because there is nothing to be assigned–beneficiary may get nothing.”
“But, on the other hand, if there was an assignment, then assignee will step into the shoes of the beneficiary. Because beneficiary could not compel payment, 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”
Involuntary Alienation in discretionary trusts
“On one hand, creditors cannot attach the beneficiary’s right to future payments because there is nothing to attach. Trustee may never allocate anything to the beneficiary. Beneficiary cannot compel payment, and neither can creditors. Thus, there is nothing to attach by creditors.”
“on the other hand, if 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.”
Discretion + HEMS standard
Comes up often on bar.
Analyze under discretionary trusts and HEMS support trust
