1. Rights of beneficiaries & Creditors

2. Overview Beneficial Interests Rights of Creditors
Discretionary Trusts & Creditors Rights
Spendthrift Trusts
Self-Settled Asset Protection Trusts

3. Recurring Tensions – Flashpoints
The rights of the beneficiaries (Bs) vs. the rights of the settlor to dictate the who, when, and amount of distributions
The rights of the present interest Bs vs. the rights of the future interest Bs and rights of Bs within each category among one another
The trustee’s discretion vs. the Bs’ needs & wants
The claims of creditors vs. the settlor’s intent to protect the Bs
The need for flexibility in administering trusts based on changing circumstances

4. Beneficial interests

5. Beneficiary Rights
Who are the beneficiaries and what are their rights:
To income?
To principal/corpus during trust administration?
To property (remainder) on termination?

6. Beneficiary Rights
Trust beneficiaries may enforce their interests through:
In personam actions against the trustee
In rem actions as the equitable owner of the trust res

7. Beneficiary Rights
Extent of beneficiaries’ interest depends on the settlor’s manifested intention
Mandatory– trust may require the trustee to perform a certain act (e.g., to pay $1,000 per week to beneficiary B)
Discretionary– trust may allow the trustee to use his/her judgment to perform a certain act (e.g., to pay to beneficiary B or for her benefit as much of the principal and income as may be necessary to support B in the manner to which she has become accustomed)

8. Trust distributions
Look to language of trust and all other evidence of intent at time of execution
What is the standard for trust distributions?
Guiding principle will be the settlor’s intent
Trustee has a fiduciary duty to protect a beneficiary’s right to distributions
The beneficiary's right to distributions may be:
Mandatory or discretionary distributions
Spray or sprinkle discretionary distributions

9. What is a Discretionary Trust?
Trustee has discretion over when, to whom, and in what amount to make a distribution
Beneficiary cannot alienate/transfer Beneficiary’s interest in the trust
In general, Beneficiary’s creditors cannot “reach” the trust property
Creditor of Beneficiary cannot compel Trustee to make a distribution from the trust to satisfy Beneficiary’s debt

10. Discretionary Standards
Standards frequently used by a settlor to give guidance to the trustee, beneficiaries, and court:
Health (H)
Education (E)
Maintenance (M)
Support (S)
Emergency
Hardship
Comfort
Happiness
Welfare
Best interests
In trustee’s absolute/sole/unfettered discretion
Synonymous

11. Ascertainable vs. Non-Ascertainable Standards
Health, Education, Maintenance, Support (HEMS) and likely Emergency and Hardship
Terms of this type are considered objective and quantifiable
Non-ascertainable
Comfort, Happiness, Welfare, Best interests
Terms of this type lack objective quality and are less quantifiable
No standard
In trustee’s absolute/sole/unfettered discretion

12. Discretionary Distributions
One of the frustrating things about the distribution standards is that none of them has a
clear, black letter definition
Discretionary Distributions
Why would Settlor leave the distributions to the trustee’s discretion?
Because the trustee can take into account the circumstances at the time of the potential distribution
If the distributions are discretionary, how is the trustee “policed?”
Through the Duty of Prudence
In all cases, a trustee must exercise discretion taking into
account numerous factors involving the trust and the beneficiaries

13. Things to consider: permitted use & purposes of distributions
“Maintenance, education, support, and health”
Purchase or improvement of a principal or vacation residence
Pursue a business opportunity or professional practice
Incentive provisions: matching earned income (in full or in some multiple), with exceptions for pursuing a socially important but low paying job or profession, illness, and other exceptions
What is the standard of living to be “maintained”
What is included in “health”: drug/alcohol/mental illness rehabilitation; infertility treatments or adoption, requirement for or assistance with the maintenance of health insurance to extent possible
What is included in “education”: tuition only, type of living circumstances that would be funded, level of education that will be funded by trust, such as college but not graduate school or any education, reeducation after loss of job or desire for career change or time off (i.e., sabbatical, years at home with young children)

14. Reasons for creating Discretionary Trusts
To preserve flexibility in distributions over time
Asset protection
Trustee may given discretion as to who, what, and when
But trustee is bound to act reasonably and in good faith
Generally, a beneficiary’s creditors have no recourse against the beneficiary’s interest in the trust
Generally, a beneficiary cannot alienate his/her trust interest
But, these are not hard-and-fast rules …

15. How Much Direction to Give the Trustee?
Settlors must consider this fundamental question:
“When I am no longer living or capable of making decisions, how do I ensure the trustee will manage and distribute the assets for my children as I would?”
This is a key issue at the drafting stage. On the one hand, the settlor wants to give the trustee some direction about what to do in given situations. On the other hand, the settlor probably does not want to tie the trustee’s hands as circumstances change.
Should the settlor provide standards or leave the decision entirely to the discretion of the trustee or is there a middle ground?

16. Hypo 1: Mandatory or Discretionary
Settlor’s will: “I give the rest and residue of my estate, real and personal, to my surviving wife, in trust, to liquidate the property and invest the proceeds in income-producing stocks, and to pay the income to my children, at least quarterly, for their support and maintenance, and to distribute the principal to them when they reach age 25.”
Does the trustee have mandatory or discretionary powers with regard to income or principal or both?
This trust is entirely mandatory
There is no discretion anywhere to pay more or less or to distribute different amounts to different beneficiaries

17. Hypo 2: Mandatory or Discretionary
Settlor: “I give the residue of my estate to the First Coast Bank, in trust, to distribute the income to my spouse for her life, and at her death to distribute the reminder in any proportion, to my then living children, as my trustee sees fit. My spouse is to have the right to make withdrawals from principal up to a maximum of 10% per year.”
Does the trustee have mandatory or discretionary powers with regard to income or principal or both?
This trust has one small discretionary element, but the rest is mandatory

18. Tension: Now & Later
In particular, although the issue can also exist with an individual trustee
A corporate trustees may be reluctant to make many distributions because of concerns that remainder beneficiaries will complain later
If a trustee refuses to make discretionary distributions, the worst that can happen is that the trustee will be told to make some distributions
If a trustee distributes more than was appropriate and remainder beneficiaries challenge a distribution after the fact, the trustee may have to reimburse the trust
Thus, there is an incentive for a corporate trustee to distribute less than the current beneficiaries may want

19. Deference to Trustees
Once the trustee has done its due diligence and acted accordingly, it is rare for a court to second-guess and mandate or reverse the trustee’s action because the trustee will not have acted in bad faith, unreasonably, arbitrarily, or capriciously.
Failure to act at all would be cause for court action.
Trustee’s overriding responsibility is to consider the intent of settlor and purpose of trust.

20. What did court say about Trustee’s need to inquire into settlor’s purpose/intent?
As of what point in time?
What evidence is permitted to answer intent?
What did the court say was Trustee’s responsibility toward the present beneficiaries, the parents? Toward remainder beneficiary, Wilbur?
What type of conduct by Trustee would warrant judicial interference? Did he act in good faith? Were his decisions/judgments reasonable? How does court know what is reasonable?
Rowe v. Rowe
Whether the trustee acted reasonably in distributing only $600 of $7,500 of income to parents
I hereby give, bequeath and devise all of said rest, residue and remainder of my said estate unto my cousin, Wilbur G. Rowe … in trust nevertheless for the use and benefit of my parents, … and to pay to and for the use and benefit of [them] and/or the survivor of them any or all rent, income and profits therefrom and any or all of the principal or corpus thereof entirely according to his own judgment and discretion.

21. Review: Duty of Impartiality
If the document itself is not specific about priorities, the settlor's intention can be found in how the trust is constructed or in things the settlor said
The duty of impartiality says that the trustee must consider the interests of all beneficiaries - but not equally
The trust instrument can direct the trustee to favor one over the other
For example: The terms of a trust for a surviving spouse, with the remainder to their children, could say that the trust is for the primary benefit of the spouse or
It could say that the trustee should manage the trust primarily for the benefit of the remaindermen, with the trust there as a back-up for the spouse

22. Is There a Duty to Investigate Needs?
The trustee has an affirmative duty to act in a reasonable manner in attempting to ascertain the beneficiary's needs and, under the usual rule of construction, other resources that may be appropriately and reasonably available for purposes relevant to the discretionary power
The trustee generally may rely on the beneficiary's representations and on readily available, minimally intrusive information requested of the beneficiary
This reliance is inappropriate, however, when the trustee has reason to suspect that the information thus supplied is inaccurate or incomplete
Trustees entitled to discovery of beneficiary's financial statements and may require beneficiary to disclose other sources of income
In fact, it may be an abuse of discretion not to inquire into financial circumstances of all discretionary distributees before making payments to one

23. What was standard of distribution established in the trust by settlor
What was standard of distribution established in the trust by settlor? Is the discretion given to Trustee narrow and specific (ascertainable) or broad and open-ended?
What duties did court state the Trustee has to present and future Bs?
When did court say it was appropriate for it to intervene?
Mesler v. Holly
Action brought by remaindermen great-grandchildren due to perceived abuse by trustee for unreasonable and excessive invasions that have depleted the remainder.
A. The CO-TRUSTEES [Holly & Gussler] shall hold the trust estate for the use and benefit of ELAINE J. HOLLY under the following provisions:
2. The CO-TRUSTEES may in their absolute discretion distribute so much of the principal of the trust estate as the CO-TRUSTEES deem necessary to Maintain the standard of living to which ELAINE J. HOLLY has become accustomed.

24. Support and Maintenance
What factors the trustee should consider, if the trust instrument does not provide direction other than the standard itself?
The amount in the trust
Who the beneficiaries are
The relationship of the beneficiaries to the settlor
Any sense of whether the settlor preferred current beneficiaries or future beneficiaries
For the current beneficiary, the accustomed standard of living of the current beneficiary
Maybe the other assets and income of the current beneficiary
The cases are mixed on whether to consider other assets and income if terms of the trust do not explain

25. Warner v. Trust Co. Bank (Emergency)
What evidence did court review to decide?
What does “emergency” mean?
Is it normally a broad or narrow standard?
What is required?
If my husband is without sufficient income from this and all other sources to provide comfortably for his wants according to the style of living which we have enjoyed, or to meet any emergency, such as prolonged illness, which may affect him, then I authorize my Trustees to invade the principal to such an extent and so often as may be necessary to provide ample funds for these purposes. I wish my Trustees to be generous in the interpretation of this provision, as my chief purpose in placing this property in trust is to see that my husband is well cared for.
Whether settlor intended to provide for Husband’s wants (which would almost be a limitless standard) or needs

26. Combs v. Carey’s Trustee (Welfare, Best Interests, and Happiness)
... the Donor directs the trustee, in addition to disbursing the income to Donor's daughter, to expend such part of the corpus of the trust estate as the trustee may deem necessary or proper for the comfort, welfare and happiness of Donor's said daughter at any and all times, even if it should require the entire corpus of the trust estate. But the trustee's discretion is to control and the exercise thereof in any reasonable and proper manner is not to be subject to question by anyone in any way.
What duties did court state the Trustee has to determine standard of living of B and needs consistent with it?
What facts influenced the court?
Should the court have intervened at all considering that “the exercise thereof in any reasonable and proper manner is not to be subject to question by anyone in any way?”
Action brought by guardian ad litem for remainderman due to abuse for unreasonable and excessive invasions by Clara that have depleted the remainder.

27. Hypo 1
A trust provides: “The trustee shall distribute all the income to my son, Jeremy, and on Jeremy’s death, distribute whatever remains in the trust to my daughter, Kristyn.” What discretion does the trustee have with respect to the amounts Jeremy and Kristyn will receive?
This appears to be a completely mandatory trust with respect to the amounts that Jeremy and Kristyn will receive
But the trustee still has discretion over what investments to choose and the investments can dictate “income”

28. Hypo 2
A trust provides: “The trustee shall make distributions from principal for the education of my grandchildren.” What information would be helpful in advising the trustee?
Can the trustee pay tuition for a grandchild who is attending law school?
Can the trustee pay the expenses of a one-year trip around the world for a grandchild who wants to educate himself through travel?
For each of the requested distributions in (a) and (b), what due diligence would be required to establish reasonableness and good faith rather than an abuse of discretion for a decision to distribute or a decision not to distribute?

29. Hypo 3
A trust provides: “The trustee shall distribute such amounts as the trustee determines, in the trustee’s sole discretion, to be appropriate for Francine’s happiness and welfare.” (Francine is a niece of the settlor.) Must the trustee make distributions to cover the costs of a vacation for Francine? Could the trustee make a distribution for that purpose? What if the trust has a relatively small corpus? What if the trust has a substantial corpus and Francine has always lived a lavish lifestyle?

30. Hypo 4
Marisa created a trust for her husband, Keenan. Keenan is the trustee and the trust provides, “The trustee shall, in the trustee’s sole and absolute discretion, make such distributions as the trustee sees fit for my spouse’s health, education, maintenance, or support. On the death of my husband, the trustee shall distribute all remaining corpus to my niece, Elizabeth Jane Smith.”
Keenan made distributions for lavish vacations, a fancy car, and lots of designer clothes. Elizabeth Jane has come to you to ask whether she can curb his distributions. She asked Keenan to distribute less, but he pointed out that he is empowered to act in his “sole and absolute discretion” so he can distribute whatever he thinks best. Advise Elizabeth Jane.

31. Recap: Trustee Duties & Discretion
Unless the trust gives specific direction otherwise, the trustee has the duty to perform “due diligence” to determine who all the Bs are & their needs as they pertain to the criteria for distribution. (Trustee may request financial statements to accomplish this task.) The settlor’s intent is the guiding principle. Normally, need is based on the B’s accustomed standard of living at the time the B’s interest ripens and usually includes a consideration of other resources.
Once having gathered the facts and determined needs, it is within the discretion of the trustee to decide what to do. The size of the trust relative to the needs of present and future Bs is relevant. If due diligence is performed properly, courts generally will leave the final decision to the trustee so long as the determination is not (i) clearly erroneous or unreasonable, (ii) an abuse of discretion and capricious, or (iii) favors one set of Bs over others, esp. where the trustee is also a B. But without the due diligence, any decision may be considered arbitrary.

32. RIGHTS OF CREDITORS

33. Therefore the assets while in the trust can be attached; not just distributions and regardless of the amount the settlor is entitled to under the trust terms
Creditors of Settlor
UTC §505 - Creditor’s Claim Against Settlor
Whether or not the terms of a trust contain a spendthrift provision, the following rules apply:
During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor’s creditors.
With respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit. …
Therefore the assets while in the trust can be attached; but only to the extent of the amount the settlor is entitled to under the trust terms

34. Creditors of Settlor of Revocable Trust
Only irrevocable trusts may offer asset protection
Property in a revocable trust is treated as the functional equivalent of settlor’s ownership
Therefore, present and (generally) future creditors of settlor can attach property in trust regardless of standards of distribution, as can a trustee in bankruptcy
Non-settlor beneficiaries only have expectancy so creditors cannot get order to attach distributions or assets

35. Creditors of Settlor of Irrevocable Trust
For present creditors, Uniform Fraudulent Conveyances Act (UFCA) or Uniform Fraudulent Transfers Act (UFTA) may apply if actual or constructive fraud
For future creditors of settlor who is also a beneficiary, no protection even if distributions are subject to trustee’s discretion or to a spendthrift clause
Possible exceptions:
Foreign Asset Protection Trusts
Domestic Asset Protection Trusts

36. Recap: Creditors of a Revocable Trust
Creditors of Settlor/Beneficiary of
Revocable Trust
Creditors of Non-Settlor Beneficiary of
Present Creditors
Creditors can attach property of revocable trust during settlor’s life and from estate under UTC 505
No rights until distributed– mere expectancy (or interest too contingent)
Future Creditors
Creditors can attach property of revocable trust during settlor’s life and from estate

37. Recap: Creditors of an Irrevocable Trust
Creditors of Settlor of an Irrevocable Trust
Present Creditors
Creditors can attach property of trust per UTC 505, whether settlor is a beneficiary or not
Future Creditors
If settlor is a beneficiary, creditors may reach the maximum amount that the trustee could have paid to the settlor/beneficiary. UTC 505.
If settlor is not a beneficiary and has not retained any control or interest, settlor doesn’t own anything and his/her creditors have nothing to attach

38. Discretionary Trusts & Creditors rights

39. Types of Discretionary Trusts: Traditional Approach
Pure Discretionary Trust
Trustee has absolute discretion over distributions to Beneficiary
Beneficiary cannot voluntarily transfer Beneficiary’s interest in the trust
Creditors of Beneficiary have no recourse against Beneficiary’s interest in the trust
But a creditor can obtain a court order requiring that the creditor be paid if any distributions are made from the trust

40. Types of Discretionary Trusts: Traditional Approach
Support Trust
Trustee is required to make distributions as necessary for Beneficiary’s needs
Beneficiary cannot voluntarily transfer Beneficiary’s interest in the trust
Insulates trust property from ordinary creditors
Not insulated from claims of some creditors:
Child support claims
Alimony claims
Claims of providers of “necessities” (e.g., medical care)

41. Types of Discretionary Trusts: Traditional Approach
Discretionary Support Trust
Not recognized as a separate type under traditional law; typically treated as a pure discretionary trust
Trustee has discretion over distributions to Beneficiary but the instrument provides some distribution “standard”
E.g., “make distributions of income and principal as necessary or appropriate to provide for the comfort and care of my spouse, in the trustee’s sole and absolute discretion”
Beneficiary cannot voluntarily transfer Beneficiary’s interest in the trust
Creditors of Beneficiary have no recourse against Beneficiary’s interest in the trust

42. Pure Discretionary Trusts & Creditors
Creditor of a beneficiary cannot compel the trustee to make a distribution to satisfy the beneficiary’s debts
“Hamilton” orders (also known as “cutting-off” orders)
Named for Hamilton v. Drogo, 150 N.E. 496 (N.Y. 1926)
Dowager Duchess of Manchester set up a discretionary trust to protect her spendthrift son, the 9th Duke of Manchester
Court held that creditor of the 9th Duke could not compel the trustee to make a distribution from a discretionary trust to satisfy the Duke’s debt
But creditor could obtain a court order (a “Hamilton” order) prohibiting the trustee from making any further distributions to the beneficiary until the creditor has been paid

43. Support Trusts & Creditors
Trustee required to make distributions as necessary for beneficiary’s needs (typically, education or support)
Traditionally, the beneficiary of a support trust cannot alienate his/her interest
Insulates the trust property from some but not all of the beneficiary’s creditors (child, spouses, and suppliers of necessities)

44. Discretionary Support Trusts & Creditors
Discretionary Support Trust – a hybrid
Common for a trust to combine absolute discretion with a distribution standard
Trustee has uncontrolled discretion to make distribution for beneficiary’s education, support, or some similar standard
Not formally recognized as a separate category under traditional law
Courts tend to treat like a pure discretionary trust
Creditors cannot compel distribution
But will be subject to a Hamilton order

45. Discretionary Trusts Under the UTC
No distinction between pure discretionary, support, or discretionary support trusts
No clear categories – a continuum
For all “categories” of discretionary trusts, a creditor cannot compel Trustee to make a distribution to satisfy Beneficiary’s debts (except for child support and alimony claims)

46. Discretionary Trusts Under UTC §504(b)
UTC §504(b) does not say that the creditor cannot get a court order/writ attaching any distribution the trustee decides to make.
Whether the creditor can get a writ of attachment of distributions is a matter of state law; the existence of a spendthrift clause or not will be important in this respect.
Discretionary Trusts Under UTC §504(b)
Whether or not a trust contains a “spendthrift” provision,
A creditor of Beneficiary may not compel a distribution that is subject to the trustee’s discretion,
Even if:
The discretion is expressed in the form of a standard of distribution, or
Trustee has abused the discretion
This provision does not protect mandatory distributions of income or principal

47. Discretionary Trusts Under UTC §504(c)
In states that have adopted UTC §504, the exception that says a trustee may be compelled to exercise its discretion applies to super/exception creditors only
If Trustee has not complied with a standard of distribution or has abused Trustee’s discretion:
A distribution may be ordered by the court to satisfy a judgment or order against Beneficiary for support or maintenance of Beneficiary’s child, spouse, or former spouse, and
The court shall direct Trustee to pay to the child, spouse, or former spouse such amount as is equitable under the circumstances
. . . but not more than Trustee would have been required to distribute to Beneficiary if Trustee had complied with the standard or not abused Trustee’s discretion

48. Spendthrift Trusts

49. What is a Spendthrift Trust?
Allows Settlor to provide for a “spendthrift” heir without putting the trust property at risk
Definition: A spendthrift (also called profligate) is someone who spends money prodigiously and who is extravagant and recklessly wasteful, often to a point where the spending climbs well beyond his or her means
Beneficiary cannot voluntarily alienate/transfer her interest

50. What is a Spendthrift Trust?
Beneficiary’s creditors cannot reach the trust property (in general) . . .
. . . even if Beneficiary is entitled to mandatory distributions
Court cannot compel Trustee to make distributions to satisfy Beneficiary’s creditors (in general)

51. Almost any type of trust can be a spendthrift trust
Trust Terminology
A mandatory-income trust is one in which the trustee is required to distribute all of the trust’s income on a regular basis
A discretionary trust is one in which the trustee has discretion, i.e., authority to make, or not to make, certain types of distributions
A spendthrift trust is a trust whose governing instrument contains language prohibiting alienation by the beneficiary and immunizing the beneficiary's interest from the claims of creditors
A trust can be both a mandatory-income trust and a spendthrift trust
Or a trust can be both discretionary and spendthrift
Almost any type of trust can be a spendthrift trust

52. The Spendthrift Clause
“The beneficiaries’ interests in the principal and income shall not be subject to the claims of any creditor, or the legal process, and may not be voluntarily or involuntarily transferred, alienated, or encumbered”
Clause imposes a “disabling restraint on alienation of the beneficial interest”

53. Recap: Creditors of Non-Settlor Beneficiary
A court may not allow a creditor to garnish a distribution if the beneficiary can establish the money is needed for her basic living costs
Recap: Creditors of Non-Settlor Beneficiary
Present & Future Creditors of Non-Settlor Beneficiary
No Spendthrift Clause
Creditor can get a court to issue a writ of attachment or garnishment respecting present & future distributions, whether mandatory or discretionary, to or for benefit of beneficiary to the extent not otherwise exempt.
With Spendthrift Clause
Creditor cannot get a court to issue a writ of attachment or garnishment respecting present & future distributions, whether mandatory or discretionary. Creditor will have to wait until distribution and then have sheriff serve levy on beneficiary

54. Spendthrift Trusts Under UTC §502
Spendthrift clause is valid only if it prohibits both voluntary and involuntary transfer of Beneficiary’s interest
Stating that the trust corpus is held subject to a “spendthrift trust” or words of similar import is sufficient
Beneficiary may not transfer an interest in a trust in violation of the spendthrift provision, and Beneficiary’s creditors cannot reach Beneficiary’s interest in the trust or a distribution by Trustee before its receipt by Beneficiary (except as provided in UTC §503)

55. Exceptions to the Spendthrift Provision: UTC §503(b)
Unenforceable against the following super creditors
A spendthrift provision is unenforceable against:
a beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance; and
a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust; and
a claim of the State or the United States to the extent a statute of the State or federal law so provides

56. Exceptions to the Spendthrift Provision: UTC §503(c)
A claimant against which a spendthrift provision cannot be enforced may obtain from a court an order attaching present or future distributions to or for the benefit of Beneficiary
The court may limit the award to such relief as is appropriate

57. Are All Trusts Spendthrift Trusts?
Traditional/majority rule
Minority of jurisdictions
Trust is not a spendthrift trust unless the instrument expressly includes a spendthrift clause
Presumption of spendthrift trust

58. Recap: Creditors of a Beneficiary Who Is Not the Settlor
The basic rule is that creditors can get what a beneficiary can get
Recap: Creditors of a Beneficiary Who Is Not the Settlor
Can creditors can reach a beneficiary’s beneficial interest?
Mandatory – yes, unless spendthrift clause
Discretionary – no
UTC §504 creates exceptions for property subject to discretionary standards if there is no spendthrift clause – note, §504 is not widely adopted
If the trust includes spendthrift clause protection, then even mandatory distributions are protected
Exceptions:
Case law, in some states:
Children with child support orders
Former spouses with support or maintenance orders
Tort creditors?
UTC §503
Child support & support for former spouse

59. Shelley predates the UTC;
UTC §503 would reach the same result with respect to the mandatory income
Shelley v. Shelley
Son disappeared
Income to son for life.
Principal subject to distribution after age 30 at trustee’s discretion.
However, separate provision for distributions to son or his children for emergencies.
Spendthrift clause.
Issue: can former wives and children reach trust for alimony (for only one of two wives) and child support ordered by court?

60. Child Support and Spousal Support
In most jurisdictions, child support and spousal support claims are exempt from spendthrift provisions
And therefore can be enforced against debtor’s interest in a spendthrift trust

61. What about tort creditors?
Should there be an exception from a spendthrift clause for tort creditors?
The majority in Duvall v. McGee held no
The dissenting judge argues that a tort creditor is different from other judgment creditors in that a tort creditor is a victim and did not chose her tortfeasor

62. Other exceptions to Spendthrift Trusts
Other claimants who are, in most/many states, exempt from spendthrift provisions include:
Those who provide “necessary services” to protect Beneficiary’s interest in a trust (i.e., attorneys)
Those who provide Beneficiary with “necessities” such as medical care

63. Recap: Spendthrift Trusts
Spendthrift provisions are generally enforceable
Claims of all creditors against the trust property are barred . . .
. . . unless the state statute specifically exempts that type of claim or creditor (e.g., claims for unpaid child support) from the spendthrift provision
There is no exemption for tort creditors under the UTC (see official comment to UTC §503) and in most states

64. Spendthrift + Discretion = Maximum protection
Creditors of Non-Settlor Beneficiary
Mandatory
Distributions of Income or Principal
Without a spendthrift clause, creditors of non-settlor beneficiaries may get a writ of attachment to require trustee to make distributions directly to creditor.
If there is a spendthrift provision, “regular” creditors may not get a writ of attachment.
However, super/exception creditors may get a writ even though there is a spendthrift provision.
Discretionary
Distributions
To the extent distributions are mandatory, creditors of non-settlor beneficiaries may get a writ of attachment to require trustee to make distributions directly to creditor, absent a spendthrift provision.
To the extent distributions are subject to the discretion of trustee, creditors of non-settlor beneficiaries may not force or compel a distribution. In the states that have adopted section 504(c), only a VERY limited class of super/exception creditors can compel that distributions be made.
If a discretionary trust also has spendthrift provisions, “normal” creditors may neither compel a distribution nor get a writ attaching distributions. Some overlapping super creditors may do both.

65. Hypo 1
Nina created an irrevocable, inter vivos trust for her nephew, Dashiel. The trust directs the trustee to distribute all the income to Dashiel, at least annually, and also directs the trustee to distribute the amounts the trustee determines to be necessary for Dashiel’s health, education, maintenance, and support.
Dashiel has fallen behind on a bank loan he took out personally to help pay for law school. Can the bank look to the trust to satisfy Dashiel’s outstanding debt and, if so, in what manner and to what extent? 

66. Hypo 2
Nina created an irrevocable, inter vivos trust for her nephew, Dashiel. The trust directs the trustee to distribute all the income to Dashiel, at least annually, and also directs the trustee to distribute the amounts the trustee determines to be necessary for Dashiel’s health, education, maintenance, and support.
Dashiel was married and had a child. He dissolved the marriage three years ago and was ordered to pay child and spousal support. He has not paid either for two years. Can his child and former spouse look to the trust to satisfy Dashiel’s outstanding debt and, if so, in what manner and to what extent?

67. Hypo 3
Nina created an irrevocable, inter vivos trust for her nephew, Dashiel. The trust directs the trustee to distribute all the income to Dashiel, at least annually, and also directs the trustee to distribute the amounts the trustee determines to be necessary for Dashiel’s health, education, maintenance, and support.
Dashiel asks the trustee to distribute some of the principal of the trust so that he can travel to his sister’s wedding. Can the trustee do so? If the trustee makes a distribution, can the bank reach the money distributed?

68. Recap: Settlor & Creditors
There is little or no protection for a settlor who retains an interest in the trust. Whether or not the trust contains a spendthrift provision, (i) with respect to a revocable trust, during the lifetime of the settlor, the settlor’s creditors may get a court order attaching all the property of the trust, and (ii) with respect to an irrevocable trust, the UTC says the settlor’s creditors may get a court order attaching the maximum amount that can be distributed to or for the settlor’s benefit. UTC 505.
Even if the settlor did not retain an interest in the trust, there is no protection from existing creditors. 
The only protection possible for the settlor is if s/he transferred all his/her interests in the property into an irrevocable trust and retained no rights to the income or property of the trust. 
In this situation, the settlor’s future creditors may not look to the trust to satisfy debts any more than they could go after a gift in fee simple made to a child several years before the debt arose. 

69. Recap: Non-Settlor Beneficiary & Creditors
For debts of non-settlor beneficiaries - existing and future - an irrevocable trust may shield the beneficiary’s interest from the claims of his/her creditors. This is accomplished by two principal methods: (i) the discretion to make distributions given to a trustee and (ii) spendthrift clauses.

70. Self-Settled Asset Protection Trusts

71. Setting the Stage: The Approach Under the UTC and Traditional Law
Remember: assets held in a revocable trust of which Settlor is the beneficiary are typically considered to be assets of Settlor
Settlor cannot shield assets from creditors by placing the assets in a trust for his/her own benefit
True even if the trust is structured as a discretionary trust, spendthrift trust, or both
See UTC §505

72. Self-Settled Asset Protection Trusts
Traditional rule – a person cannot shield assets from creditors by placing them in a trust for his/her own benefit
Even if the trust is discretionary, spendthrift, or both, settlor’s creditors can reach whatever amount the trustee is authorized to pay to the settlor or on the settlor’s behalf

73. Rise of the Self-Settled Asset Protection Trust
Enacted in Alaska in 1997; followed by 13 other states
Patterned after the trust laws of offshore jurisdictions
Unclear state of the law – lack of appellate decisions

74. How the Self-Settled Asset Protection Trust Works
Settlor transfers his property to Trust in trust, for the benefit of Settlor
The trust instrument includes a spendthrift provision
Settlor retains the right to receive income - and even the principal - of the trust property
The trust property is protected from creditors; creditors cannot attach to the trust property

75. Criticism of the Asset Protection Trust
Allows Settlor to put his own assets in trust, of which he is the Beneficiary, and shield those assets from his creditors by including a spendthrift clause
Allows Settlor to avoid personal liability for his own debts

76. The End