TN 26 (12-14)
PS 01825.146 Guam
A. PS 15-023 Regional Survey – Spendthrift Clauses in Trusts in the Region IX states
DATE: June 27, 2014
This opinion provides a summary of the law pertaining to spendthrift provisions in the states in Region IX. It gives guidance on distinguishing between third party and self-settled trusts as well as the difference between limitations on the beneficiary and creditors.
You asked whether the Region IX states recognize spendthrift clauses in trusts.
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.
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 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. 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. 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 recognizes the validity of spendthrift trusts on a third party beneficiary; that is, a beneficiary other than the settlor. 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 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) (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. 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 recognizes spendthrift provisions in trusts for third party beneficiaries as well as self-settled trusts. 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.
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).
You advised that we need not include Region IX territories in this survey. We have included Guam but not American Samoa or the Commonwealth of Northern Mariana Islands.
Arizona law also permits the creditors or assignees of a trust beneficiary to reach the trust corpus before the beneficiary receives a distribution, despite a spendthrift clause. See Ariz. Rev. Stat. §§ 14-10502(C), 14-10503. Even if one of these limited circumstances might apply to a spendthrift trust, it does not change the general spendthrift rule that the beneficiary cannot transfer his or her interest in the trust income or principal or sell his or her beneficial interest in the trust. Therefore, Arizona’s spendthrift exceptions, if applicable, do not change the rule that funds held in a spendthrift trust do not constitute a resource for SSI purposes. See POMS SI 01120.200.B.16 & SI 01120.200.D.2.
If a trust has more than one settlor or contributor, a creditor or assignee of a particular settlor may only reach an amount that does not exceed that settlor’s interest in the portion of the trust attributable to his contribution. See Ariz. Rev. Stat. §§ 1410505(A)(1), 14-10505(A)(2).
Although California recognizes spendthrift trusts, it has numerous exceptions, including: self-settled trusts; spousal, child support, or restitution judgments; reimbursement to the state or a local public entity for public support provided to the beneficiary or the beneficiary’s spouse or child; orders for payment to judgment creditors; and amounts paid out in excess of the amount that is or will be necessary for the beneficiary’s education and support. See Cal. Prob. Code §§ 15304 to 15307. These exceptions do not change the general rule that the trust does constitute a resource for SSI purposes. See POMS SI 01120.200.B.16 & SI 01120.200.D.2.
The Permitted Transfers in Trust Act is codified in Chapter 554G, Division 3 (Property; Family), Title 30 (Guardians and Trustees) of Hawaii’s Revised Statutes. See Haw. Rev. Stat. §§ 554G, 554G-1. This act applies to permitted transfers made after the effective date, July 1, 2010. See Haw. Sess. Laws 2010, ch. 182, § 2.
Creditors may reach property in a spendthrift trust if the transfer was done with the intent to defraud, hinder, or delay the creditor. Haw. Rev. Stat. § 554G-8(a). Other exceptions to spendthrift trusts include obligations due to child or spousal support; tort claims; claims of lenders who extended credit in reliance on the availability of trust assets; tax claims of the state of Hawaii; and the transferor-beneficiary’s interest with respect to assets transferred to the trust that are subject to division following a divorce or dissolution of a marriage or civil union. See Haw. Rev. Stat. § 554G-9. These exceptions do not change the general rule that the trust does not constitute a resource for SSI purposes. See POMS SI 01120.200.B.16 & SI 01120.200.D.2.
The Spendthrift Trust Act of Nevada is codified in Chapter 166 (Spendthrift Trusts) of Title 13 (Guardianships; Conservatorships; Trusts) of Nevada’s Revised Annotated Statutes. See Nev. Rev. Stat. Ann. §§ 166.010-166.180.
A creator of a spendthrift trust may make different provisions than set forth in sections 166.080 to 166.150 by using express and specific written terms. See Nev. Rev. Stat. § 166.170.