QUESTIONS
You asked whether the Region IX states recognize spendthrift clauses in trusts. [1]
SHORT ANSWERS
Arizona, California, Hawaii, and Nevada all recognize the validity of spendthrift
provisions with respect to third party beneficiaries. With respect to self-settled
trusts (where the settlor is also the beneficiary), Arizona does not recognize spendthrift
provisions unless it is in an irrevocable special needs trust where discretionary
payments are made to a disabled settlor.
California provides that spendthrift clauses in self-settled trusts are invalid. Hawaii
and Nevada recognize the validity of spendthrift provisions in self-settled trusts
if certain requirements are met. Guam appears to follow California law with respect
to spendthrift provisions.
OVERVIEW:
A spendthrift clause or spendthrift trust prohibits voluntary and involuntary transfers
of a trust beneficiary’s interest in the trust income or principal. See Program Operations Manual System (POMS) SI 01120.200.B.16. The spendthrift clause
is a way to protect the beneficiary’s interest from creditors because they cannot
reach any funds held in trust. Instead, creditors must wait until the money is paid
out from the trust to the beneficiary before they can attempt to claim it to satisfy
any debts. Id. Similarly, spendthrift clauses prevent the beneficiary from selling his or her right
to receive future trust distributions to a third party for a lump sum. Id. Under these principles, if a trust has a valid spendthrift clause, the value of the
trust beneficiary’s right to receive payments from the trust is not countable as a
resource for SSI purposes. Id.; see also POMS SI 01120.200.D.1.a & D.2.
ARIZONA:
Arizona recognizes the validity of spendthrift provisions that restrain voluntary
or involuntary transfer of a beneficiary’s interest. Ariz. Rev. Stat. Ann. § 14-10502(A). Language stating that a beneficiary’s interest
is held subject to a spendthrift trust, or similar terms, are sufficient to create
a spendthrift trust. Ariz. Rev. Stat. § 14-10502(B). A beneficiary may not transfer
an interest in a trust in violation of a valid spendthrift provision, and neither
creditors nor assignees of the beneficiary may reach the interest or a distribution
by the trustee before the beneficiary receives it. [2] Ariz. Rev. Stat. § 14-10502(C); see also Ariz. Rev. Stat. § 1410501(B); In re Indenture of Trust Dated January 13, 1964, 2014 WL 2041881, *5 (Ariz. App. Ct. May 16, 2014) (finding that a spendthrift beneficiary
does not have the power to “thwart” the purpose of the provision and cannot consent
to or ratify the alienation of his beneficial interest in the trust).
The spendthrift provisions do not, however, protect the settlor in the same way that
they protect the trust beneficiary. Even if a revocable trust contains a spendthrift
provision, the property of the trust is subject to the claims of a settlor’s creditors
during the settlor’s lifetime. See Ariz. Rev. Stat. § 14-10505(A)(1). Similarly, for irrevocable trusts with a spendthrift
provision, a settlor’s assignees or creditors may reach the maximum amount that can
be distributed to or for the settlor’s benefit. [3] See Ariz. Rev. Stat. § 14-10505(A)(2); Arizona Bank v. Morris, 6 Ariz. App. 566, 568, 435 P.2d 73, 75 (Ariz. App. Ct. 1967) (holding that a person
cannot insulate his property from creditors by temporarily placing it in a spendthrift
trust so that the income and principal of the trust remain payable to him).
However, during the lifetime of the settlor, a settlor’s creditors may not reach or
compel distributions to or for the benefit of the beneficiary of a special needs trust.
See Ariz. Rev. Stat. § 14-10505(A)(2)(c). Thus, spendthrift provisions in self-settled
irrevocable special needs trusts are effective, and discretionary distributions for
the benefit of the disabled individual would not be transferable. However, spendthrift
provisions in self-settled revocable trusts are invalid.
Finally, creditors of beneficiaries to discretionary trusts (which may include special
needs trusts), may not compel a distribution whether or not the trust contains a spendthrift
provision. Ariz. Rev. Stat. § 14-10504(A); see Ariz. Rev. Stat. § 14-10506 (distinguishing mandatory distributions). Thus, discretionary
trusts are not countable as resources although the distribution may be countable as
income. See POMS SI 01120.200.D.2.
CALIFORNIA:
California recognizes the validity of spendthrift trusts on a third party beneficiary;
that is, a beneficiary other than the settlor.[4] If the trust provides that a beneficiary’s interest in trust income or principal
is not subject to voluntary or involuntary transfers, it may not be transferred and
is not subject to enforcement of a money judgment until paid to the beneficiary. Cal.
Prob. Code §§ 15300, 15301(a). Similarly, if the trust provides that the trustee shall
pay income and/or principal for the beneficiary’s education or support, the income
and/or principal necessary for the beneficiary’s education or support may not be transferred
and is not subject to the enforcement of a money judgment until paid to the beneficiary.
Cal. Prob. Code § 15302. Furthermore, if the creator’s intent is reasonably plain,
no specific language is required to create a spendthrift trust. See In re De L~’s Estate, 62 Cal. App. 2d 808, 813 (Cal. App. Ct. 1944). The beneficiary’s creditors or transferees
may not compel the trustee to pay any amount that is in the trustee’s discretion to
pay, regardless of whether there is a standard provided for the trustee’s discretion.
See Cal. Prob. Code §§ 15303(a), 15303(c).
A settlor may validly create a self-settled trust; however, the spendthrift clause
in a self-settled trust is invalid against transferees or creditors. Cal. Prob. Code
§ 15304(a). Even if trust distributions to the settlor/beneficiary are at the discretion
of a trustee, a transferee or creditor may reach the maximum amount the trustee could pay the settlor; except this amount cannot exceed the settlor’s contribution to the
trust. Cal. Prob. Code § 15304(b); see also In re Brooks-Hamilton, 348 B.R. 512, 521 (N.D. Cal. 2006).
HAWAII:
Hawaii recognizes spendthrift provisions in all trusts, including those that are self-settled,
and those that name third party beneficiaries as well as the settlor as beneficiary.
Haw. Rev. Stat. § 554G-5(d) [5] (trusts may provide that the beneficiary’s interest, including a beneficiary who
is the transferor of the trust, may not be transferred, assigned, pledged, or mortgaged,
whether voluntarily or involuntarily, before the trustee distributes the property
or income to the beneficiary); see also Haw. Rev. Stat. § 554G-2 (defining “transferor” to mean the same as settlor or grantor);
Welsh v. Campbell, 41 Haw. 106 (Haw. Terr. 1955) (adopting spendthrift trust rule for Hawaii). All
trusts are irrevocable. See Haw. Rev. Stat. § 554G-5(a). However, a self-settled trust with a spendthrift provision
is not beyond the reach of the settlor’s creditors. [6] See Cooke Trust Co. v. Lord, 41 Haw. 198 (Haw. Terr. 1955) (cited with approval in Holualoa Aloha, LLC v. Anekona Aloha, LLC, 129 Hawaii 106, 2013 WL 709670 at *1 (Haw. App. 2013) (unpublished order) (upholding
garnishment of self-settled trust with spendthrift clause)).
NEVADA:
Nevada recognizes spendthrift provisions in trusts for third party beneficiaries as
well as self-settled trusts. [7] Nev. Rev. Stat. § 166.040(1); see also Nev. Rev. Stat. § 166.020 (defining a spendthrift trust as a trust that contains
a valid restraint on the voluntary and involuntary transfer of the beneficiary’s interest),
§ 166.120 (providing for restraints on beneficiary’s voluntary and involuntary transfer
or assignment of trust corpus and right to future payments). However, a spendthrift
trust created for the benefit of the settlor must (1) be irrevocable, (2) not require
any distributions of the trust income or principal to the settlor, and (3) not be
created with the intent to hinder, delay or defraud known creditors. Nev. Rev. Stat.
§ 166.040(1)(b). The settlor has only those powers set out in the trust instrument.
Nev. Rev. Stat. § 166.045.
Although no specific language is required to create a valid spendthrift trust, so
long as the creator’s intent is clear, a spendthrift trust must be in writing and
clearly identify the beneficiaries in that writing. Nev. Rev. Stat. §§ 166.040(1),
166.050, 166.080. The trustee’s discretion regarding the application or payments of
sums to the beneficiary as set forth in the trust is absolute. Nev. Rev. Stat. § 166.110.
The beneficiary has no power or capacity to make any disposition of the income, and
the beneficiary’s interest is not subject to any process of attachment nor can it
be taken in execution under any form of legal process. Nev. Rev. Stat. § 166.120(3).
The trustee shall apply the trust estate and income solely for the beneficiary’s benefit,
discharged from all of the beneficiary’s obligations. Id.[8]
GUAM:
Guam law mentions spendthrift trusts when discussing both wills and testamentary trusts
and therefore appears to recognize at least third party spendthrift provisions. See Guam Code Ann. Tit. 15, §§ 763, 3309(d). However, every transfer of property, obligation
incurred, or judicial proceeding taken with the intent to delay or defraud a creditor
or other person is void against all creditors of the debtor, their successors in interest,
and any person whom the debtor’s estate passes in trust for the benefit of others
than the debtor. See Guam Code Ann. Tit. 20, § 6101.
Guam also appears to follow California law. See Guam Code Ann. Tit. 15, Refs. & Annos. (Title 15 of the Guam Code Annotated, effective
March 16, 1982, was enacted to replace the former Probate Code of Guam, and the basis
for the substantive changes was California law as of the date of drafting in 1980).
Accordingly, Guam likely follows California law with respect to the treatment of spendthrift
trusts. See Guam Code Ann. Tit. 15, §§ 763, 3309(d) (indicating the source of law is now-repealed
sections of the California Probate Code).