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ATTORNEY [ licensed to practice in KOREA, U.S.A., ILLINOIS ] LEE, JAE WOOK
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[Title]
ĶϾƽŹ ͱ
Start →

IV. TRANSFER OF THE BENEFICIARY'S INTEREST

A.         ALIENABILITY IN GENERAL





1.         Voluntary Alienation

In the absence of
        a) some provision
                i) in a statute or
                ii) trust instrument
                        (a) to the contrary
        (e.g., restriction on alienation of contingent interest),

1) the equitable interest of a trust beneficiary is freely alienable
        a) to the extent
                i) the beneficiary can transfer other property.

The transferee takes the interest
        a) subject to
                i) all conditions and
                ii) limitations
                        (a) that would have applied
                                (i) but for the assignment.

2.         Involuntary Alienation

Except
        a) as otherwise provided
                i) by statute or
        b) as validly restricted
                i) by the terms of the trust instrument,

1) the interest of
        a) an insolvent trust beneficiary

   can generally be reached
        a) in appropriate proceedings
                i) (such as a creditor's bill in equity)
                ii) to satisfy the claims of his creditors.

However,

unless the debtor
        a) is the sole beneficiary and
        b) can
                i) presently
                ii) demand conveyance of the trust property,

1) the creditor reaches
        a) only the interest
                i) of the beneficiary and
        b) not the trust property itself.

The basic remedy of the creditor is
        a) to sell the beneficial interest and
        b) have the proceeds applied to his claim,
                i) with the buyer
                        (a) at the sale
                        (b) acquiring the exact interest
                                (i) the debtor held as beneficiary.

Because of the sacrifice element involved,

1) a court of equity
        a) may refuse
                i) to order sale of an income interest and
        b) will instead require the trustee
                i) to pay the beneficiary's income
                        (a) to the creditor
                        (b) until the debt is satisfied
        c) if the creditor will be paid
                i) by this method
                ii) within a reasonable time.

B.         RESTRAINTS ON ALIENATION -SPENDTHRIFT TRUSTS


A spendthrift trust is one
        a) in which,
                i) by statute or
                ii) more often by virtue of the terms of the trust,
                        (a) the beneficiary is unable
                                (i) voluntarily or involuntarily
                                (ii) to transfer his interest in the trust.

In other words,

1) he cannot
        a) sell or
        b) give away
                i) his right to future
                        (a) income or
                        (b) capital, and

2) his creditors are unable
        a) to collect or
        b) attach
                i) such rights.

This type of trust is usually created
        a) to provide a fund
                i) for the maintenance of the beneficiary
                ii) that will be secure
                        (a) against his own improvidence.

1.         Rights of Creditors

What are the rights of the creditors
        a) of an income beneficiary
                i) of a spendthrift trust?

Creditors cannot reach the beneficiary's interest
        a) in the sense of
                i) selling it
                        (a) as a means of
                                (i) realizing upon and
                                (ii) anticipating
                                        (A) his future rights.(i.e., not yet received)

However, the restraint on alienation does not apply to
        a) the income
                i) after it has been paid out (i.e., the trustee payed out to the beneficiary)
                        (a) to the beneficiary.

Thus, the property
        a) in the beneficiary's hands
                i) after distribution

1) is no longer protected
        i) by the spendthrift clause (because this clause is applied to the trustee) and
2) is subject to the claims of his creditors.

(However, the creditors have to catch the beneficiary
        a) before he spends it!)

2.         Restraint on Involuntary Alienation Only -Invalid

A restraint that
        a) prohibits creditors
                i) from reaching a beneficiary's interest (involuntary transfer),
        b) but does not prohibit the beneficiary
                i) from voluntarily alienating his interest,

1) violates public policy.

If
        a) the beneficiary could give his interest away,
        b) but his creditors could not reach it,

1) it would violate the basic rule
        a) that creditors can reach any interest
                i) the debtor can alienate.

(Nonetheless, in a few cases, the restraint on involuntary alienation alone has been upheld.)

3.         Attempted Assignment in Violation of Spendthrift Provision

Assume that
        a) A,
                i) the income beneficiary of a spendthrift trust,
                ii) has purported to assign his interests to B.

1) An assignee(B) in such a case cannot compel a trustee to pay.

Thus,

1) B can not compel the trustee
        a) to pay the income to him, and
2) the trustee may not do so
        a) over A's objection.

1) The purported assignment does, however, operate
        a) as an authorization to the trustee
                i) to pay income to B, and

2) as long as the authorization has not been repudiated by A,
        a) the trustee may,
                i) without liability,
                ii) make payments to B.

Such an authorization generally does not violate the spendthrift restraint,
1) because the trustee could pay A,
        a) who could turn it over to B.

But the authorization may be repudiated by A
        a) at any time.

4.         Exception -Settlor as Beneficiary

An important exception
        a) to the validity of spendthrift restraints

1) is that the settlor cannot protect his own retained interests
        a) from his creditors
        b) by the inclusion of a spendthrift provision.

Example:   If S transfers to T in trust to pay income to S for life, remainder to B, and the trust includes a spendthrift clause,

        S's creditors can reach S's right to the income just as if the spendthrift clause had not been included.

        Rationale: If this were not true, debtors could easily avoid their creditors and retain income from their property.

a.         Test for Determining Whether Beneficiary Is Also Settlor

Sometimes it is not clear
        a) whether the beneficiary is also the settlor.

If a person furnishes the consideration
        a) for the creation of a trust,

1) he is the settlor,
2) even though the trust is created
        a) by another person.


Example:   If in consideration of the conveyance of Blackacre from A to B, B transfers Whiteacre to T in trust for A for life, remainder to As children,

        A is the settlor of the trust. A's life estate can be reached by his creditors and can be assigned by him, even though the trust contains a spendthrift clause.

5.         Exceptions for Special Classes of Creditors

Even where spendthrift restrictions are valid,

1) in a number of states
2) the beneficiary's interest is subject to
        a) certain types of claims
        b) such as the claims of
                i) dependents,
                ii) the government, and
                iii) persons
                        (a) supplying necessities
(e.g.,
        a) a divorced wife can usually reach the husband's interest
                i) to satisfy a claim for alimony; and
        b) the federal government can reach the interest
                i) to pay taxes owing).

In a few states,

1) tort creditors can reach the trust assets
        a) on the theory that
                i) they,
                        (a) unlike contract creditors,
                        (b) have no means of protecting themselves
                                (i) against the beneficiary's actions.
C.         DISCRETIONARY TRUSTS

In a discretionary trust,

1) the trustee is given discretion
        a) whether to
                i) apply or
                ii) withhold payments of
                        (a) income or
                        (b) principal
                        (c) (or both)
                                (i) to a beneficiary.

This discretion relates to
        a) more than just
                i) the time and
                ii) manner
                        (a) of payment;

2) it actually limits
        a) the extent of the beneficiary's rights
                i) to the amounts
                        (a) the trustee decides to give him,
        b) with the rest going over to others eventually.

1.         Creditors' Rights

a.        Before Trustee Exercises Discretion -Interest Cannot Be Reached

Before the trustee exercises his discretion
        a) to make payments to the beneficiary,

1) the beneficiary's interest
        a) is not assignable and
        b) cannot be reached by his creditors.

The theory is that,
        a) because the beneficiary has no right to payment
                i) that he can enforce against the trustee,
        b) there is nothing
                i) for the creditors to reach
        c) i.e., the creditors' rights cannot rise
                i) above those of the beneficiary.

b.         After Trustee Exercises Discretion -Payments Made to Creditors

If the trustee
        a) exercises his discretion and
        b) elects to make payments to the beneficiary,

1) the trustee must make those payments
        a) not to the beneficiary
        b) but directly to
                i) his creditors or
                ii) assignees
2) if the trustee has notice of
        a) an assignment or
        b) attachment by the creditors,
3) unless the beneficiary's interest is protected
        a) by a spendthrift restriction.

Example:   T bequeaths a sum in trust to pay the income and principal to B in the trustee's uncontrolled discretion.

        B's creditors cannot require the trustee to pay the income or principal to them.

        However, by giving notice to the trustee, they can prevent the trustee from paying B until their claims are satisfied.

         Of course, if there is a spendthrift clause, they cannot reach B's interest in any way and the trustee can pay B if he chooses to do so.

c.         Creditors May Reach Discretionary Interest Created for Settlor

The few cases on point seem to establish
        a) the principle that
                i) where a discretionary interest is created
                        (a) for the settlor himself,
                ii) his creditors can reach the retained interest.

2.         Beneficiary's Rights

The beneficiary cannot interfere with the exercise of the trustee's discretion
1) unless the trustee abuses his power.

What constitutes abuse depends upon
        a) the extent of discretion
                i) conferred upon the trustee.

If the trust is a "support trust,

1) there is more room
        a) for a court's interference
2) because the trust has a specific purpose;

but even if the trustee's discretion is uncontrolled,
1) the court will interfere
2) if the trustee acts
        a) in bad faith or
        b) dishonestly.

← End



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