Trusts & Federal Estate Tax: Creditors' Rights & Spendthrift Trusts

Front 1

Spendthrift clauses are given full effect in TX.

Purpose: protect trust beneficiary's interest from creditors by prohibiting voluntary assignment or involuntary transfer of beneficiary's interest. Judgment creditor can't reach beneficiary's interest in spendthrift trust by garnishment or attachment.

Back 1

Exceptions:

1) Contracts for necessaries (medical, food, rent)
2) Child support obligations
3) Any interest retained by Settlor
4) Revocable trust
4) Fed tax liens

Front 2

Beneficiary who participates in breach of trust: estopped from complaining about trustee following his instructions

Back 2

Creditors can reach income after it's been distributed to a beneficiary from a spendthrift trust.

Once income is distributed, it's no longer subject to the trust or its spendthrift clause.

Hint 2

But, creditors would have to file suit each time beneficiary received a distribution. Spendthrift clause takes away creditors' efficient remedies of garnishment and attachment. Moreover, creditor can't use "turnover statute" of Creditors' Rights law to compel beneficiary to pay over the income to the creditor upon its receipt.

Front 3

As to any interest retained by the Settlor (or entire trust if Settlor retained the power to revoke the trust) --> no spendthrift protection (fair game to creditors)

Back 3

As to interests irrevocably transferred to third parties (whether outright or in trust) settlor's creditors: can't reach because he doesn't own it anymore!

Hint 3

Exception:

Fraudulent transfer. Made with intent to defeat, delay, or defraud creditors.

Front 4

Suppose that irrevocable trust doesn't contain a spendthrift clause as set out above, but merely states: "This shall be a spendthrift trust." Valid?

Back 4

Yes. Trust code expressly so provides.

Front 5

Discretionary trust:

"Trustee may distribute to Settlor so much of the trust income and/or principal as Trustee in its sole discretion deems appropriate."

Back 5

Trustee has sole discretion and not subject to any standard. Can't compel distribution.

Hint 5

Creditor can reach trust income or principal in satisfaction of judgment obligation to max extent that trustee could make a distribution to him

Front 6

Support Trusts

"Income to my daughter D for life, remainder to her children. ... "as is needed for her support" "

Back 6

Can compel distribution of amount she shows is needed for her support. Purpose of the trust was not to give the trustee discretion; it was to provide for D's support.

Any distribution of principal far in excess of actual support needs is a breach of trust, and remaindermen have an action against trustee.

Hint 6

Creditor who furnishes necessaries can reach a support trust. If the beneficiary could compel a distribution for support purposes, so also can a creditor who furnishes necessaries.