Trusts: rights to distribution Flashcards
Types of beneficiaries
Income beneficiaries receive income from the trust, e.g., profits from a business held by the trust.
Remainder beneficiaries are entitled to the trust principal upon termination of the trust.
Creditor rights
A beneficiary’s creditor may only reach trust principal or income when:
(1) Such amounts become payable to the beneficiary; or
(2) Are subject to the beneficiary’s demand.
Alienation
A beneficiary’s equitable interest is freely alienable—i.e., it can be sold or used as collateral for a loan—unless a statute or trust instrument limits this right.
Creditor rights: support trusts
A support trust is one that directs the trustee to pay income or principal as necessary to support the trust beneficiary.
Creditors cannot reach the assets of a support trust except to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee.
Creditor rights: discretionary trusts
If a trustee exercises her discretion to pay, then the beneficiary’s creditors have the same rights as the beneficiary—unless a spendthrift restriction exists.
If the discretion to pay is not exercised, then the beneficiary’s interest cannot be reached by her creditors.
Note: The beneficiary of a fully discretionary trust lacks standing to challenge the actions or inactions of the trustee unless there has been a clear abuse of discretion.
Creditor rights: spendthrift trusts
A spendthrift trust, through a spendthrift clause, expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer her equitable interest.
Creditors usually cannot reach the trust interest unless money is owed for:
(1) Child or spousal support;
(2) Basic necessity providers; or
(3) Tax lien holders.
Income
(1) Traditional approach:
The traditional approach assumed that any money generated by trust property was income.
(2) Uniform Principal and Income Act:
The traditional approach serves as the starting point for the modern approach.
Under the UPAIA, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument.
Principal
(1) Traditional approach:
The traditional approach assumed that any money generated in connection with a conveyance of trust property was principal.
(2) Uniform Principal and Income Act:
The traditional approach serves as the starting point for the modern approach.
Under the UPAIA, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument.
A distribution of stock is treated as a distribution of principal under the UPAIA.
Power of appointment
A power of appointment enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust.
A special power of appointment allows the donor to specify certain individuals as the objects of the power, to the exclusion of others.
Most states allow the holder of the power to exercise it by creating a trust for the benefit of the object, rather than transferring the property directly.
Challenging an inter vivos transfer
In some jurisdictions, the surviving spouse can set aside inter vivos transfers made by the decedent during marriage, without spousal consent, if the decedent:
(1) initiated the transfer within one year of her death;
(2) retained an interest in the property—e.g., by reserving a right to revoke a trust; or
(3) received less than adequate consideration.
