Trusts February 2003 Flashcards
(4 cards)
Summary
Generally, an income interest subject to a spendthrift clause is not available for payment of claims against the income beneficiary. However, many states, for public policy reasons, do not apply this rule to unpaid alimony claims. In such states, Trustee should pay Susan’s $5,000 claim. On the other hand, Trustee cannot pay John’s claim from the trust because Beth is not entitled to any principal until the trust terminates and a payment to John would harm both Adam and Charity. Lastly, the court should refuse to terminate the trust because termination would be inconsistent with Decedent’s intent as evidenced by the presence of a spendthrift clause in the trust instrument.
Trustee should distribute $5,000 from trust income to Susan in payment of her unpaid alimony claim notwithstanding that Adam’s interest is subject toa spendthrift clause.
The testamentary trust created by Decedent contains language that clearly indicates Decedent’s intention to subject Adam’s 10-year term interest to a spendthrift restriction. Spendthrift clauses are widely recognized. See generally Restatement (Second) of Trusts § 152(1) and Restatement (Third) of Trusts § 58 (Tent. Draft No. 2). The effect of a spendthrift clause is to bar a creditor from reaching the beneficiary’s interest in satisfaction of the creditor’s claim.
However, there are exceptions to the general rule for public policy purposes. A well-established exception enables a former spouse with an unpaid alimony judgment to reach a spendthrift trust interest of his or her former spouse. See Restatement (Second) of Trusts § 157(a); Restatement (Third) of Trusts § 59(a)(Tent. Draft No. 2); Uniform Trust Code § 503(b). This exception recognizes a strong public policy against allowing a trust beneficiary to enjoy a trust interest while neglecting to pay the court-ordered support of the beneficiary’s former spouse. Accordingly, Trustee should pay Susan $5,000 to satisfy her unpaid alimony judgment against Adam.
Note: Even though Susan is entitled to receive $5,000 from the trust income, Trustee, as a practical matter, should not make that distribution to her without an authorizing court order. This protects Trustee from any possible liability for having made an inappropriate distribution to Susan. Also, if the jurisdiction does not adhere to the alimony exception, Trustee should distribute nothing from the trust to Susan.
Trustee cannot properly pay $10,000 to John from the trust principal in payment of his tort judgment against Beth because Beth’s interest is a remainder interest.
The testamentary trust created by Decedent contains no language evidencing Decedent’s intent to subject Beth’s remainder interest to a spendthrift restriction. Absent such a restriction, Beth’s interest would generally be alienable and reachable by her creditors. See generally Restatement (Second) of Trusts §§ 132 & 157 and Restatement (Third) of Trusts §§ 51 & 57 (Tent. Draft No. 2).
However, because Beth is a remainder beneficiary and not an income beneficiary, she has no immediate right to the possession and enjoyment of any trust property. Rather, she must await the termination of the trust to receive any trust property. John, as her creditor, can have no greater rights in the trust property than she had. As her creditor he simply steps into her shoes. Thus, he cannot obtain possession of her share any earlier than she could have obtained possession of it. Payment of trust principal to him at this time, therefore, would be premature.
Furthermore, if Trustee gave John any trust principal at this time, the rights of both Adam and Charity would be adversely affected since the income to which they are and will be entitled is generated from the principal. Any payment to John, therefore, would reduce the future income flow from the trust.
Accordingly, Trustee should not pay John’s $10,000 claim from the trust principal.
The court should refuse to terminate the trust and should not distribute the trust assets to the beneficiaries.
It is a well-established rule that a testamentary trust can be terminated by a court upon the request and consent of all trust beneficiaries unless a material purpose remains to be accomplished. See Restatement (Second) of Trusts § 337. The bar against termination when a material purpose remains is referred toas the Claflin doctrine and is based on the seminal nineteenth-century case, Claflin v. Claflin, 20 N.E. 454 (Mass. 1889). The Claflin doctrine assures that a trust will not be terminated when termination would be inconsistent with the grantor’s intent.
Accordingly, the question is whether there is a material purpose of the trust that would be defeated if the trust were to terminate. The traditional view is that a material purpose remains if any trust interest is subject to a spendthrift restriction that bars alienation of the spendthrift interest. Termination is inappropriate because, if trust assets are distributed to a beneficiary of a spendthrift interest, the beneficiary could later alienate the property. Under this view, the court should refuse to terminate the trust and should not order Trustee to distribute the trust assets to the beneficiaries.
Even under the third Restatement, the court should refuse to terminate the trust. This Restatement rejects the per se prohibition on trust termination where there is a spendthrift clause. It requires a finding that the trust grantor really intended the spendthrift provision to bar premature trust termination. Under this test, a spendthrift clause inserted in a trust as mere boilerplate might not bar a requested termination when all trust beneficiaries consent to the termination. Restatement (Third) of Trusts § 65, comment e (Tent. Draft No. 3). See also Uniform Trust Code § 411(c) (spendthrift clause is not presumed to constitute a material purpose of the trust). Here, however, the facts clearly indicate that Decedent would not have wanted Adam to prematurely reach his interest due to Decedent’s unhappiness with Adam’s lavish spending, and therefore the court should not terminate the trust.
