Question Presented
You have requested a legal opinion on the revocability of grantor trusts and the validity
of spendthrift clauses in the six states that comprise Region VIII (Colorado, Montana,
North Dakota, South Dakota, Utah, and Wyoming).
Background
A grantor trust is a trust in which the grantor is also the sole beneficiary. The
grantor is the individual who provides the trust principal. SSA considers the individual
who funds the trust to be the grantor, even if the trust agreement names a person
acting on behalf of the individual as the grantor. The grantor is often called the
“settlor,” and these terms may be used interchangeably.
Some states follow the general principle of trust law that if a grantor is the sole
beneficiary of a trust, the trust is revocable regardless of language in the trust
to the contrary. See POMS SI 01120.200(D)(3). However, many of these states also recognize that if the trust names a residual
beneficiary to receive the benefit of the trust interest after a specific event, usually
the death of the primary beneficiary, then the trust is irrevocable. The primary beneficiary
cannot unilaterally revoke the trust because he/she would need the consent of the
residual beneficiary. You asked whether states in the Denver region follow these general
principles.
A spendthrift clause prohibits voluntary and involuntary transfers of a beneficiary’s
interest in the trust income or principal. See POMS SI 01120.200(B)(16). A spendthrift clause is a way to protect the beneficiary’s interest from
creditors, because creditors must wait until money is paid from the trust to the beneficiary
before they can attempt to claim it to satisfy any debts. Likewise, spendthrift clauses
prevent the beneficiary from selling or assigning his or her right to receive future
trust distributions to a third party for a lump sum. Under these principles, if a
trust has a valid spendthrift clause, the value of the beneficiary’s right to receive
payments from the trust is not countable as a resource for SSI purposes. See id.; see also POMS SI 01120.200(D)(1)(a) & (D)(2). However, some states that recognize spendthrift clauses do not
allow a grantor to establish a spendthrift trust for his/her own benefit. You asked
how these rules apply in the Denver region states.
These considerations are relevant in determining whether a trust is countable as a
resource. If the SSI beneficiary has the authority to revoke or terminate the trust
and use the funds for support, the trust is counted as a resource. Further, if the
SSI beneficiary may sell his or her beneficial interest in a trust, the amount of
that interest is a resource; a valid spendthrift clause, however, would prevent such
a sale, making the interest not countable.
Discussion
Revocability where Grantor is the Sole Beneficiary
(A) It is appropriate to assume that all six states in Region VIII follow the general
principle that, where the settlor is the sole beneficiary of the trust (i.e., does
not name any residual beneficiaries), the trust is revocable regardless of the express
language of the trust. Montana, Utah, and Wyoming have directly relevant statutes
or case law, and we believe the other states would follow the majority rule absent
any contrary authority. See Restatement (Third) of Trusts, § 65 (majority of states find trust revocable when
settlor is the sole beneficiary); Scott and Ascher on Trusts, § 34.3 (same).
(B) All six states in Region VIII follow the principle that residual beneficiaries
are created when the settlor designates heirs, next of kin, or similar groups to receive
remaining trust assets upon the primary beneficiary’s death.
(C) As relevant to revocability, it should also be noted that in Colorado, Montana,
North Dakota, Utah, and Wyoming, the settlor may revoke a trust unless the trust expressly
states that it is irrevocable (even if there are residual beneficiaries). In other
words, if the trust is silent with respect to revocability, the trust is revocable.
Therefore, when a trust is evaluated under these states’ laws, it is important to
confirm that there is specific language in the trust expressly stating it is irrevocable.
References:
Colorado:
(A) No relevant statute or case law so assume state follows majority rule.
(B) Colo. Rev. Stat. § 15-11-710 (abolishing “doctrine of worthier title,” such that
reference to heirs or next of kin does not create reversionary interest in settlor).
(C) Colo. Rev. Stat. § 15-16-702(a) (settlor may revoke or amend unless trust expressly
states that it is irrevocable).
Montana:
(A) Mont. Code Ann. § 72-38-411 (irrevocable trust may be terminated upon consent
of the settlor and all beneficiaries).
(B) Mont. Code Ann. § 72-2-720 (abolishing doctrine of worthier title).
(C) Mont. Code Ann. § 72-38-602 (settlor may revoke or amend unless trust expressly
states that it is irrevocable).
North Dakota:
(A) N.D. Cent. Code Ann. § 59-12-11. (411) (omitting provision of Uniform Trust Code
(UTC) regarding termination by consent of settlor and beneficiaries). Pursuant to
Drafting Committee’s comments to UTC (2004), this omission suggests the state’s prior
law controls and prior law was silent on the issue, therefore assume state will follow
majority rule.
(B) N.D. Cent. Code Ann. § 30.1-09.1-10. (2-710) (abolishing doctrine of worthier
title).
(C) N.D. Cent. Code Ann. § 59-14-02. (602)(1) (settlor may revoke or amend unless
trust expressly states that it is irrevocable).
South Dakota:
(A) No relevant statute or case law so assume state follows majority rule.
(B) S.D. Codified Laws § 29A-2-710 (abolishing doctrine of worthier title).
(C) S.D. Codified Laws § 55-4-30 (settlor may reserve power to terminate trust through
terms of the trust).
Utah:
(A) Utah Code Ann. § 75-7-411 (irrevocable trust may be terminated upon consent of
settlor and all beneficiaries).
Clayton v. Behle, 565 P.2d 1132, 1133 (Utah 1977) (where settlor is “sole beneficiary
. . . he can terminate the trust at any time and compel the trustee to reconvey the
property to him”).
(B) Utah Code Ann. § 75-2-710 (abolishing doctrine of worthier title).
(C) Utah Code Ann. § 75-7-605(1) (settlor may revoke or amend unless trust expressly
states that it is irrevocable).
Wyoming:
(A) Wyo. Code Ann. § 4-10-412(a) (termination allowed after finding by court that
settlor and all qualified beneficiaries consent). Absent contrary authority, it is
reasonable to assume court finding not required where settlor is the only beneficiary.
(B) Wyo. Code Ann. § 34-1-137 (abolishing doctrine of worthier title).
(C) Wyo. Code Ann. § 4-10-602(a) (settlor may revoke or amend unless trust expressly
states that it is irrevocable).
Validity of Spendthrift Clause
A. Validity of Spendthrift Clause in a Third-Party Trust
In a third-party trust (i.e., the trust is funded with the assets of an individual
who is not the SSI beneficiary), all states in Region VIII recognize the validity
of a spendthrift clause. Therefore, where a third-party trust includes a spendthrift
clause, the beneficiary cannot sell his or her beneficial interest in the trust and
that interest is not a resource.
References:
Colorado:
University Nat. Bank v. Rhoadarmer, 827 P.2d 561, 563 (Colo. App. 1991) (“The validity and enforceability of spendthrift
provisions in this state is not disputed.”).
Montana:
Mont. Code Ann. § 72-38-502 (“A beneficiary may not transfer an interest in a trust
in violation of a valid spendthrift provision . . . .”).
Lundgren v. Hoglund, 711 P.2d 809, 811 (Mont. 1985) (“We hold spendthrift provisions to be valid in Montana.”).
North Dakota:
N.D. Cent. Code Ann. § 59-13-02.(502) (“A beneficiary may not transfer an interest
in a trust in violation of a valid spendthrift provision . . . .”).
In re Schauer, 246 B.R. 384, 388 (Bankr. D. N.D. 2000) (“North Dakota law generally recognizes
the validity of spendthrift trust provisions.”) (citing Brownell v. Leutz, 149 F.Supp. 98, 103 n.7 (D.N.D. 1957)).
South Dakota:
S.D. Codified Laws § 55-1-34 (“A settlor may provide in the terms of the trust that
a beneficiary’s beneficial interest . . . may not be voluntarily or involuntarily
transferred before payment or delivery . . . by the trustee.”).
First Northwestern Trust Co. v. IRS, 622 F.2d 387, 392 (8th Cir. 1980) (interpreting South Dakota law, concluding court
would enforce spendthrift provision consistent with majority rule).
Utah:
Utah Code Ann. § 75-7-502(3) (“A beneficiary may not transfer an interest in trust
in violation of a valid spendthrift provision . . . .”).
Wyoming:
Wyo. Stat. Ann. § 4-10-502(c) (“[A] beneficiary may not transfer an interest in a
trust in violation of a spendthrift provision . . . .”).
B. Validity of Spendthrift Clause in Trust for Grantor’s Own Benefit
In a self-settled trust (i.e., the trust is funded with the assets of the SSI beneficiary),
the issue is less straightforward:
-
•
In Montana, a spendthrift clause in a self-settled trust is invalid.
-
•
In North Dakota, a spendthrift clause is valid in a special needs trust or a pooled
trust meeting the criteria in POMS SI 01120.203.
-
•
In South Dakota, Utah, and Wyoming, a spendthrift clause will be valid in a self-settled
trust that meets specific and detailed requirements. The requirements differ for each
state.
-
•
In Colorado, the law is unclear.
For SSI purposes, the important issue is whether the SSI beneficiary may sell his
or her beneficial interest in the trust. In the states where a spendthrift clause
would be viewed as invalid, thus allowing the beneficial interest to be sold, it is
necessary to determine the value of that interest.
Where the trust is completely discretionary, meaning the trustee has sole authority
to determine when and whether distributions will be made, the beneficial interest
will have little to no market value. Even if the beneficial interest may be sold and
technically counts as a resource, it will have zero value.
If the trust directs any type of mandatory disbursements, the beneficial interest
will generally have a market value and should be considered a resource if it can be
sold. Determining whether or not the beneficial interest may be sold is unsettled
or complicated in Colorado, Utah, Wyoming, and South Dakota. Therefore, if a trust
is governed by the law in one of these states and directs mandatory disbursements,
we recommend referring the trust to OGC for further evaluation.
References:
Colorado
Colorado law states that grantor trusts that contain a spendthrift clause do not afford
the grantor protection from existing creditors—i.e., existing at the time of the trust’s
creation. See Colo. Rev. Stat. § 38-10-111. It is not entirely clear whether the statute applies
to future creditors. Compare Alberico v. Health Mgmt. Sys., Inc., 5 P.3d 967, 970 (Colo. App. 2000) (referencing claims at the time of the conveyance)
with In re Cohen, 8 P.3d 429, 433-34 (Colo. 1999) (applying statute to future creditors). Moreover,
the statute is silent with respect to assignees. Therefore, whether or not a spendthrift
clause in a self-settled trust would restrict the settlor from selling his or her
beneficial interest it is currently unsettled in Colorado.
Montana
Montana statutes and case law consistently indicate that a spendthrift clause in a
self-settled trust is invalid. See Mont. Code Ann. § 72-38-505(1)(b) (regardless of the existence of a spendthrift provision,
“a creditor or assignee of the settlor may reach the maximum amount that can be distributed
to or for the settlor’s benefit”); In re Ullman, 116 B.R. 228, 231 (D. Mont. 1990) (interpreting Montana law, concluding it is “essential
in creation of a spendthrift trust under Montana law that the settlor and a beneficiary
be different persons . . . .”).
North Dakota
North Dakota statute indicates that a spendthrift clause in a self-settled trust is
generally invalid, but provides a specific exception for “special needs trusts.” See N.D. Cent. Code Ann. § 59-13-03.(503)(2)-(3) (listing exceptions that would make
spendthrift provisions unenforceable and noting such exceptions “do not apply to a
self-settled special needs trust or a third-party special needs trust . . . nor to
any trust that meets the qualifications of 42 U.S.C. 1396p(d)”); N.D. Cent. Code Ann.
§ 59-13-05.(505)(1) (regardless of the existence of a spendthrift provision, “with
respect to an irrevocable trust, other than a special needs trust, a creditor or assignee
of the settlor may reach the maximum amount that can be distributed to or for the
settlor’s benefit”) (emphasis added). Therefore, assuming that the trust was established
in compliance with the requirements of POMS SI 01120.203 (which track 42 U.S.C. 1396p(d)), the spendthrift clause is valid.
South Dakota
South Dakota statute indicates that, where the settlor is also a beneficiary of the
trust, spendthrift provisions and protections apply to a “qualified transfer pursuant
to chapter 55-16 . . . .” S.D. Codified Laws § 55-1-36. Therefore, some spendthrift
clauses in South Dakota will be valid, even in a self-settled trust. The criteria
for a “qualified transfer” are numerous. See S.D. Codified Laws §§ 55-16-1 to 55-16-16.
Conversely, if the settlor is a beneficiary and the transfer is not a “qualified transfer
. . . a provision restraining the voluntary or involuntary transfer of the settlor’s
beneficial interest does not prevent the settlor’s creditors from satisfying claims
from the settlor’s interest in the trust estate.” S.D. Codified Laws § 55-1-36. The
statute is specific to creditors and silent with respect to assignees. Therefore,
whether or not the settlor is restricted from selling his or her beneficial interest
appears unsettled in South Dakota. We also note that South Dakota specifically rejects
certain sections of the Restatement (Third) of Trusts and the Uniform Trust Code for
purposes of interpreting these statutes. See S.D. Codified Laws § 55-1-25.
Utah
Utah statute indicates that a spendthrift clause in a self-settled trust is generally
invalid, but provides a specific exception for “asset protection trust” as defined
in another section. See Utah Code Ann. § 75-7-505(1)(b) (regardless of spendthrift provision, “[w]ith respect
to an irrevocable trust other than an irrevocable trust that meets the requirements
of Section 25-6-14, a creditor or assignee of the settlor may reach the maximum amount
that can be distributed to or for the settlor’s benefit.”) (emphasis added). The requirements
for an asset protection trust are numerous. See Utah Code Ann. § 25-6-14(5)(a)-(m).
Wyoming
Wyoming statutes recognize the validity of spendthrift clauses in two types of self-settled
trusts if certain criteria are met. See Wyo. Code Ann. § 55-10-506 (discussing creditor’s claim against settlor generally,
noting creditor and assigning claims limited for discretionary trusts created in accordance
with other Wyoming provisions). There are numerous criteria under both provisions.
See Wyo. Code Ann. §§ 55-10-504; 55-10-510.
Conclusion
We recommend that trusts be referred to OGC for further review in the following situations:
In Colorado, South Dakota, Utah, and Wyoming, if the trust provides for mandatory
distributions (because the beneficial value of those distributions may or may not
be countable).