Transfer of Beneficiary's Interest

Question 1

May beneficiary freely transfer her interest in trust?

Answer 1

Yes, unless there is a restriction by statute or in the trust

NOTE –> assignment will remain subject to all previous conditions and limitations

Question 2

May insolvent beneficiary’s creditors levy on her beneficial trust interest?

Answer 2

Yes, unless there is a restriction by statute or in the trust

To avoid this –> court may order trustee to pay creditor out of income to pay off debt

Question 3

What is a “spendthrift trust”?

What is the purpose?

When is it invalid?

Answer 3

“spendthrift trust” = precludes beneficiary from VOLUNTARILY or INVOLUNTARILY transferring his interest in the trust

Purpose –> to protect beneficiaries from themselves

Invalid if –> Settlor is also the beneficiary
NOTE –> there may be an issue where it looks like person who set up the trust is not settlor. Look to who provided the res.

Question 4

What are the rights of creditors to a spendthrift trust?

Answer 4

They cannot get $ until received by beneficiary

EXCEPTIONS –> some states allow certain creditors to touch (dependents, furnisher’s of necessities)

Question 5

What is the effect if settlor tries to restrict involuntary alienation only?

Answer 5

Will be invalid

Question 6

If there is a spendthrift clause, what happens if beneficiary attempts to assign their interest?

Answer 6

Assignee cannot force trustee to pay them

HOWEVER –> trustee CAN do so if beneficiary has not repudiated trustee’s authorization to pay assignees

Question 7

What is a “discretionary trust”?

Answer 7

“discretionary trust” - trustee has discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary

Question 8

What are beneficiaries rights in a “discretionary trust”?

Answer 8

Beneficiary has NO RIGHT to payment that he can enforce against trustee UNLESS trustee abuses his power

Question 9

What are creditor’s rights in a “discretionary trust”?

Answer 9

Before trustee exercises his discretion to make payments to the beneficiary —>

1. B’s interest is not assignable
2. cannot be reached by creditors

Creditors are USUALLY allowed to attach B’s interest, but may not compel trustee to make a distribution

If trustee has a notice of attachment by creditors, and decides to may payments to the beneficiary, he must make those payments DIRECTLY to creditors, unless there is a spendthrift provision

Question 10

What is a “support trust”?

Answer 10

“support trust” - directs trustee to pay only so much of the income or principal (or both) as is necessary for B’s support

• B’s interest cannot be assigned or reached by creditors
• it is a Q of settlor’s INTENT as to whether the B’s other resources should be considered in determining amount payable to him out of trust