Many parents create irrevocable trusts for their children with trust agreements with spendthrift provisions that protect the child’s beneficial interest from the child’s potential creditors. A trust agreement may elect someone other than the beneficiary to act as trustee, but it may permit the beneficiary to participate in the trustee’s decisions about investments and trust administration.
I read a case that considered whether a beneficiary loses protection of the spendthrift provisions if he exercises excessive control over trust administration and investments when a third party has been named as successor trustee. In this case, a parent had established a spendthrift trust for one of her sons and had appointed another son as successor trustee. After the parent’s death, the trustee son almost completely delegated trust operations and investment decisions to the beneficiary son. The court concluded that the trustee” simply rubber-stamped” the beneficiary’s decisions.
The beneficiary’s judgment creditors sought to penetrate the spendthrift trust on the grounds that the beneficiary controlled trust distributions and because the beneficiary otherwise had complete dominion and control over trust assets.
The appellate court denied the creditor’s position and upheld the spendthrift protection of the beneficiary’s interest. The court said that only when the beneficiary has express authority over trust distributions in the trust agreement, or has already received distributions, can a creditor reach the distributed property. A creditor may not reach assets in a spendthrift discretionary trust just because the trustee allows the beneficiary to exercise control over the trust.