Spending Time With The Spendthrift Clause - A Trusts Topic Heavily Tested on the UBE/MEE

-

Spending Time With The Spendthrift Clause - A Trusts Topic Heavily Tested on the UBE/MEE


The Spendthrift Clause (hereinafter "SC") also known as the Spendthrift Provision is a heavily tested
and extremely nuanced area of law within the confines of the subject of trusts.

The Clause, in General
So what exactly is the SC and what is its purpose?  The SC protects a trust beneficiary’s interest(s) from creditors by prohibiting voluntary or involuntary transfer of a beneficiary’s interest(s).  The SC clause is a specific clause written into the trust document. 

Rules Pertaining to the Clause
Generally, unless specifically stated, only the income of a trust will be protected by the SC clause, however the principal of the trust can also be protected if specifically stated within the SC clause.  (Note the distinction between the trust principal and the trust income.  If for example, a trust was funded with $100,000 and that amount has grown through prudent investing to a balance of $250,000, the original $100K is the principal (what the trust was funded with) and the additional $150K is known as the trust income.

To provide spendthrift protection to any remainder beneficiaries the SC must be expressly stated in the trust.  A typical SC will contain the following language: “No beneficiary of this trust shall have the power to assign his or her interest, nor shall such interest be reachable by the beneficiaries’ creditors by attachment, garnishment, or other legal process.”

The effect of the SC (statutorily or expressly stated in the trust) is to keep beneficiaries’ creditors at bay.  However, the SC will NOT protect the settlor’s interest within the trust.  This “Self Settled Trust Rule” is a big Limitation on a SC.  The SC protection does NOT apply to any interest retained by the settlor.  Moreover, settlors CAN’T hide out from their own creditors but they CAN protect other beneficiary interests. 

Exceptions to the SC
There are four major exceptions to the SC for us to remember.
(1)   Creditors who furnish necessities such as food, clothing or shelter to a beneficiary may recoup the costs pertaining to the furnishing of said necessities.
(2)   Child support and alimony.  The SC will not prevent a spouse or partner with a valid Court Order from obtaining funds from the trust in an effort to satisfy said Order.                             
(3)   Federal tax liens. In short, do not mess with the IRS.
(4)   Excess income BEYOND that which is needed for support and/or education. 

The fourth exception is used as a last resort remedy; you have to demonstrate that all other possible remedies have been exhausted.  In addition, to determine what is needed for support we look to the life style of the beneficiary.   The MEE question will specify what the beneficiary is accustomed to in terms of his or her lifestyle. 

How might we spot an issue dealing with excess income for education?  The fact pattern will make it clear that, for example, $500,000 is needed to send a grandchild to college for four years; the purpose of the trust was to send said grandchild to college.  If the trust is presently funded with $900,000, creditors will be able to reach the excess $400,000 as it exceeds that which is needed for education.

Keep in mind the following concerning distributions from the trust to a beneficiary.  Once property/trust assets have been distributed to a beneficiary that property can be reached by a creditor, except to the extent the distributed property is used to support the beneficiary. If a trust calls for a distribution to the beneficiary, but the beneficiary refuses such distribution and elects to retain the property in the trust, the spendthrift protection of the trust ceases with respect to that distribution and the beneficiary's creditors can now reach trust assets to the extent that the reach does not exceed the value of the distribution elected to remain in the trust.

In short, your task on a Trusts MEE question is to 1) determine if a spendthrift provision is provided either statutorily or via express language and then 2) determine if an exception applies. 


Should you have any additional questions about the Spendthrift Clause, the subject of trusts in general, or another area of the UBE, please do not hesitate to contact us at PassYourBarExam@gmail.com.

Comments

Post a Comment

Popular posts from this blog

Defamation on the UBE - A Step by Step Guide for the MBE and MEE

-
The tort of defamation can be rather confusing on the UBE, not just in terms of its elements and/or the applicable defenses, but more so because the MBE and MEE questions on defamation can be rather confusing.  In fact, defamation ranks as one of the top two most difficult areas of tort law along with Products Liability!   This blog post has been written to try and clean up some of the confusion associated with this tort.  For starters, let us begin with the three elements of defamation:   1 – W e need a defamatory stmnt made by the defendant that specifically identifies the plaintiff; 2 – We need a publication of that stmnt and;                    3 – Resulting d amage .   BAR EXAM NOTE – If the plaintiff is a PRIVATE PERSON? They must prove that the statement was made with NEGLIGENCE .  Conversely, if the plaintiff is a PUBLIC FIGURE ?   They m...
Read more

Per Capita vs. Per Stirpes - Making Sense of the Difference for the MEE on the UBE

-
Image
One of the more common areas of confusion within the subject of Wills is the distinction between the two methods of intestacy distribution known as Per Capita and Per Stirpes.  This blog post was created to shed some light on how best to approach these distribution methods when tackling a common Wills MEE issue on the examination.     I. Intestate Prop erty Definition This includes assets held in the decedent’s name alone that do not pass by operation of law or by a will.  It should be noted that operation of law means that a non-probate assets that passes automatically because of the way the property title is held, REGARDLESS of the existence of a will. Keep in mind that the residuary (aka the rest left over) is calculated after claims, taxes, and other particular.   II. The Application of the Intest acy Rules Intestacy Rules Apply when 1) the decedent left NO WILL OR DID NOT properly execute a will, OR 2) the will DOES NOT provide for a proper distribu...
Read more

Adding Parties & Claims in Fed Civ Pro - Interpleader, Impleader, Joinder and Intervention

-
Understanding the Differences Between Impleader, Interpleader, Joinder and Intervention Federal Civil Procedure on the UBE contains a major section that pertains to adding parties and/or claims to an already existing suit.  There are four subsections relevant to this area of law known as impleader, interpleader, intervention and joinder.   It is imperative to know the distinctions between each of these subsections. At the outset, it would behoove you to create a chart or graph to capture the distinctions between these four legal mechanisms.  Understanding the nuanced differences between these mechanisms, memorizing necessary vs. permissive joinder, and understanding the difference between intervention as a right and permissive intervention is paramount for success on MBE questions pertaining to this area of the law.  Moreover, while not as common on an MEE essay as personal jurisdiction, subject matter jurisdiction or venue, we can easily see an issu...
Read more