Transcript Rights of the Beneficiary to Distributions

Today’s topics
 Rights of the beneficiary to
distributions
 Rights of a beneficiary’s creditor to
collect from the trust
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Rights of beneficiaries


Much clearer in mandatory trusts (e.g., all of
the income of the trust is to be distributed to
beneficiary A).
With discretionary trusts, the trustee is
subject to principles of fiduciary obligation


It’s not a trust if the trustee has unlimited
freedom to exercise the granted discretion
Note that discretionary trusts range in the
amount of discretion (e.g., must distribute the
income, may distribute principal)
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Marsman v. Nasca
Marsman v.
Nasca (1)
573 N.E.2d 1025 (Mass. App. 1991), p. 598
Sara
Marsman
Cappy
Cappy
Margaret
One-third of residue, income payable quarterly,
principal paid if trustees “deem it necessary or
desirable,” in their sole discretion, for “his
comfortable support and maintenance
Sally
Marlette
Richard
Marlette
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Image courtesy of Dana Hall Archives.
Marsman v. Nasca
Marsman v.
Nasca (2)
573 N.E.2d 1025 (Mass. App. 1991)
Sara dies, leaving
Cappy an income
interest in trust,
and discretion in
trustee to pay
principal.
Cappy
executes will
leaving house
and other
property to
Margaret.
1972
1974
1971
Cappy retires,
takes out
mortgage for
$4,000 to pay bills;
marries Margaret.
Image courtesy of Dana Hall Archives.
1973
Sally and husband
cover Cappy’s house
expenses; Cappy
deeds house to
them, keeping a life
estate.
1987
Nov. 1974
Farr gives Cappy
$300 from
principal, asks for
written explanation
of need for more.
Cappy dies.
Margaret
asked to leave
house. She
sues Farr.
Cappy’s difficulty in
meeting expenses
intensifies.
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Did the trustee breach his
fiduciary duties?

How could he breach his duties if he had “sole and
uncontrolled discretion” to distribute principal?



The trustee was charged with providing “comfortable
support and maintenance,” which means in accordance
with the beneficiary’s accustomed standard of living
The trustee couldn’t prudently exercise his discretion if he
did not inquire into Cappy’s needs
Trustees always have to act in good faith and with some
degree of reasonableness (page 606)

If the trustee had sole discretion, it wouldn’t be a trust. The
point of a trust is for the trustee to fulfill the settlor’s intent, not
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the trustee’s own intent.
Did the trustee breach his
fiduciary duties?

But the trustee did ask Cappy to explain his
need for more money



The trustee’s letter “discouraged Cappy from
making any requests for principal” (page 600)
The duty to investigate requires a more active
role for the trustee. You can’t shift the burden of
investigation so readily to the beneficiary
The trustee had notice of Cappy’s needs. He
knew Cappy had taken out a mortgage on the
house (which was used to pay bills) (page 600) 6
What’s the remedy?

Can Margaret get the house back?


No, Sara and Marlette were bona fide purchases
without notice of the trustee’s breach of trust
What can Margaret get?

The funds from the trust that would have been
given to Cappy (which go directly to his estate)
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Is the trustee liable personally
for the breach of duty?


There was an exculpatory clause, and these protect
trustees from liability in the absence of bad faith, or
intentional or reckless misconduct (and the clause
itself did not excuse “willful neglect or default”)
Does it matter that the trustee drafted the
exculpatory clause?


Yes, if the trustee abused a confidential or fiduciary
relationship
This court put the burden on Margaret to prove abuse, but
the majority rule is to put the burden on the drafter to
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prove no abuse
Extended discretion;
exculpation; and arbitration
Extended
Discretion
Trustee discretion is
“sole,” “absolute,” or
“uncontrolled.”
 In spite of extended
discretion, trustee is still
subject to judicial review.
 Trustee must not act
arbitrarily or capriciously,
or abuse its discretion,
and must act in good
faith (UTC: purposes of
trust and interests of
beneficiaries).

Exculpatory
Clause
Trustee is excused
from liability or breach
of trust.
 If trustee is
draftsman, trustee
must show disclosure
of clause and its
meaning to settlor.
 Cannot excuse liability
for bad faith, reckless
indifference, or
intentional or willful
neglect.

Mandatory
Arbitration
Claims for breach of
trust must be resolved
by arbitration.
 Whether clause is
enforceable, precluding
judicial review, is
unresolved.
 Authority is scarce and
contradictory.

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Extent of discretion

“Trustee shall use the income and principal
of the trust in the trustee’s full, absolute,
and uncontrolled discretion for the
educational expenses of my children.”

Trustee pays child number one’s bills to attend
the state university, but refuses to pay child
number two’s bills to attend an out-of-state
private university.
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Rights of the beneficiary’s
creditors
 Just as trusts can be designed to protect
against mismanagement of wealth by
beneficiaries, so their support will be
secured, so can trusts be designed to
protect against seizure of the wealth by the
beneficiaries’ creditors
 Discretionary trusts
 Spendthrift trusts

If the settlor limits the beneficiary’s rights to the
trust’s assets, creditors’ access can be limited
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Evading creditors through
discretionary trusts

Pure discretionary trusts


Support trust


Trustee has absolute, sole or uncontrolled discretion
over distributions to the beneficiaries
Trustee is obligated to make distributions as necessary
for the beneficiaries’ needs
Discretionary support trusts

Trustee has absolute, sole or uncontrolled discretion
over distributions to the beneficiaries subject to a
“standard of distribution” (e.g., for the comfortable
support and maintenance of the beneficiaries, as in
Marsden, or for the education or health care needs of
the beneficiaries)
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Discretionary trusts* and
creditors
Traditional law principles
 Pure discretionary and discretionary support trusts

No right of creditors to compel payment from the
trustee—but creditors can secure a Hamilton order to
direct the trustee to pay the creditors before making any
further distributions to the beneficiaries


Doesn’t guarantee payment, but allows for substantial leverage
Support trusts

Creditors generally cannot compel payment, except for
suppliers of necessaries (e.g., food, clothing, shelter,
medicine, medical care) and for child or spousal support
* Creditors can intercept distributions from mandatory trusts
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that don’t have spendthrift clauses
Discretionary trusts:
UTC §504 (2000, rev. 2004)
(b) …a creditor of a beneficiary may not compel a distribution
that is subject to the trustee’s discretion, even if:
(1) the discretion is expressed in the form of a standard of
distribution; or
(2) the trustee has abused the discretion.
(c) To the extent a trustee has not complied with a standard
of distribution or has abused a discretion:
(1) a distribution may be ordered by the court to satisfy a
judgment or court order…for support or maintenance of
the beneficiary’s child, spouse, or former spouse;
Note that under the Restatement, creditors can reach any
distributions that a trustee makes or is required to make
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Problem, page 613
 What happens under traditional law?
 B loses—not a supplier of necessaries or a
spouse or child of A
 What result under the UTC
 B loses—not a spouse or child of A
 What result under the Restatement?
 The Restatement black letter language suggests
B wins, but the comment on page 613 makes
things unclear
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Spendthrift trusts
 Most trusts deal with the creditor problem
through the spendthrift trust
 If beneficiaries cannot alienate their interest
(e.g., sell it to a sibling), the creditors cannot
reach the interest
 A few states assume trusts are spendthrift
absent a provision permitting alienation
 In other states, spendthrift provisions are
typically included in trusts

Permitted per Ind. Code § 30-4-3-2
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Spendthrift trusts
Theory is that the trust is a conditional gift; donors can
impose conditions to protect their interests in determining the
recipient of their gifts
 Compare:

Living parent and child, where parent can provide for child  no
recourse against parent for child’s creditors.
 Deceased parent and child, where trust is to provide for child’s
support  any recourse against trust for child’s creditors?

The modern debate is not over whether to have spendthrift
trusts, but when to make exceptions.



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Voluntary creditors (e.g., lenders) can investigate finances.
Involuntary creditors (e.g., tort victims) cannot investigate.
What of spouses and children?
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Spendthrift trusts and
tort victims
 What were the facts in Scheffel, p. 616?




Kyle Krueger videotaped his sexual assault of a child
and broadcast the videotape over the internet
Kyle was the beneficiary of a trust from his grandmother
that paid him all of the net income (mandatory)
In addition, the trustee had sole discretion to pay out of
principal when necessary for Kyle’s maintenance,
support or education (discretionary support)
Kyle was convicted for the sexual assault, and the child’s
mother won a default judgment in her tort suit against
Kyle
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Scheffel v. Krueger
Scheffel v.
Krueger
782 A.2d 410 (N.H. 2001), p. 616
Art. VII: No principal or income payable or to become payable
under any of the trusts created by this instrument shall be
subject to anticipation of assignment by any beneficiary
thereof, or to the interference or control of any creditors of
such beneficiary or to be taken or reached by any legal or
equitable process in satisfaction of any debt or liability of
such beneficiary prior to its receipt by the beneficiary.
Should the court recognize an exception to
spendthrift trusts for claims by tort victims?
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Did the NH statute waive
the spendthrift clause?
 No. The clause was inapplicable only if the settlor
was the beneficiary or the assets were fraudulently
transferred to the trust
 But other states have allowed tort victims to reach
trusts with spendthrift clauses


In those cases, the spendthrift law was created by
common law. Here we have a statute that has expressly
addressed the issue (page 617)
Does this mean child support orders can’t pierce a
spendthrift clause in NH?

No. N.H. has amended its statute.
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Spendthrift trusts,
alimony and child support
 What were the facts in Shelley, p. 618?



Grant was the beneficiary of a trust that entitled him to
income and also to discretionary payments of principal
for purposes of investing and when emergency needs
arose (page 618).
The emergency needs clause included his children as
beneficiaries
The trust had a spendthrift clause as well (page 618)
 The case arose because Grant failed to make child
support payments from two previous marriages
and alimony payments from one of the marriages
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Shelley v. Shelley
Shelley v. Shelley
354 P.2d 282 (Or. 1960), 618
Testator
Patricia
Grant
Betty
Trust Income
(mandatory)
Exception for spouse or
children?
• Yes
Trust Principal
(discretionary)
Exception for spouse or
children?
• No
Children Beneficiaries
Does “emergency”
include the desertion by
father?
• Yes
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Exceptions to spendthrift provision:
UTC §503 (2000, rev. 2005)
… (b) A spendthrift provision is unenforceable against:
(1) a beneficiary’s child, spouse, or former spouse who has a
judgment or court order against the beneficiary for support or
maintenance;
(2) a judgment creditor who has provided services for the
protection of a beneficiary’s interest in the trust; and
(3) a claim of this State or the United States to the extent a
statute of this State or federal law so provides.
(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 the beneficiary.
The court may limit the award to such relief as is appropriate
... .
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Spendthrift trusts and
providers of necessities
 Can creditors who provided necessary
goods or services reach spendthrift trusts?
 Yes, according to traditional law, the
Restatement (note 2.c, page 622) and
Indiana law, but not under the UTC.
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Spendthrift clause

The interests of the beneficiaries of any trust created
by this instrument shall not be subject to or liable for
any anticipations, assignments, sales, pledges, debts,
contracts, or liabilities of said beneficiaries, including
but not limited to alimony claims and claims of any
federal, state, or local governmental agency, and said
interest shall not be seized by creditors of said
beneficiaries, or by anyone, by attachment,
garnishment, execution or otherwise.

See also Scheffel spendthrift clause
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