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.

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).

This opinion addresses whether states in Region IX consider oral trusts valid under state law and whether grantor trusts (trusts where the individual who provides the trust principle is also the sole beneficiary of the trust) are revocable. Each of the states in Region IX recognizes oral trusts for personal property as valid under state law, but requires a written document for a trust conveying real property. Under Arizona, Hawaii, and California laws, grantor trusts are generally revocable even if the trust terms state it is irrevocable. Under Nevada law, grantor trusts are generally irrevocable unless the grantor expressly retains the power to revoke it. Arizona, California, Hawaii, and Nevada all recognize that the grantor’s conveyance of trust property to his or her “heirs” creates a remainder interest in a third-party beneficiary, as opposed to merely creating a reversionary interest to the grantor.

QUESTIONS

You asked for guidance on the following questions with respect to states in Region IX: ^[9]

1. Whether grantor trusts are revocable, and whether the grantor must use specific terms to establish a remainder interest in a trust beneficiary?

2. Whether oral trusts are valid under state law?

SHORT ANSWERS

1. Under Arizona, Hawaii, and California laws, grantor trusts are generally revocable even if the trust terms state it is irrevocable. Under Nevada law, grantor trusts are generally irrevocable unless the grantor expressly retains the power to revoke it. Arizona, California, Hawaii, and Nevada all recognize that the grantor’s conveyance of trust property to his or her “heirs” creates a remainder interest in a third-party beneficiary, as opposed to merely creating a reversionary interest to the grantor.

2. Each of the states recognize oral trusts for personal property but require a written document for a trust conveying real property.

I. REVOCABILITY OF GRANTOR TRUSTS

OVERVIEW

In general, the assets of an individual are counted as a resource to that individual for purposes of Supplemental Security Income (SSI) eligibility. See generally Social Security Act § 1611(a); Program Operations Manual System (POMS) SI 01110.001. However, assets held in certain types of trusts may be exempted from counting as a resource for SSI eligibility purposes.

A grantor trust is a trust in which the individual who provides the trust principle is also the sole beneficiary of the trust. POMS SI 01120.200(B)(8). If the grantor has the legal authority to revoke or terminate the trust and use trust funds for his or her support and maintenance, the trust principle is a resource for SSI purposes. POMS SI 01120.200.D.1.a; see also POMS SI 01120.200.D.1.b. Conversely, if a trust is irrevocable, it might be excluded from resource counting (if all other necessary conditions are met).

Regarding revocability, some states follow the general rule that when a grantor is also the sole beneficiary of a trust, that trust is revocable regardless of any contrary language it contains. See POMS SI 01120.200.D.3. By the same token, many states recognize that if the trust document creates residual beneficiaries, the trust is generally considered irrevocable. POMS SI 01120.200.D.3.

Under the common law doctrine of worthier title, an inter vivos (lifetime) conveyance of property to the grantor’s “heirs” or “next of kin” was invalid because there was no designated beneficiary. See Rest. of Prop. § 314. Normally, such an invalid conveyance would mean that the grantor retained the beneficial interest. Id. at comment (d). However, a majority of states have abolished this common law rule, preferring instead to interpret a conveyance to a grantor’s heirs as a valid conveyance without reversion to the grantor. See Rest. (3d) of Prop. §§ 16.1, 16.3.

Each Region IX state’s laws regarding revocability and residual beneficiaries is discussed below.

ARIZONA

Under Arizona law, a trust is generally revocable unless the trust explicitly states it is irrevocable. See Ariz. Rev. Stat. § 14-10602 (“Unless the terms of a trust expressly provide that the trust is irrevocable, a settlor may revoke or amend the trust subject to any limitations prescribed in the terms of the trust”). However, if the grantor is the sole beneficiary of a trust, it is revocable even when the trust says it is irrevocable. See, e.g., Dreyer v. Lange, 74 Ariz. 39, 41 (Ariz. 1952).

Arizona has enacted a statute abolishing the doctrine of worthier title. See Ariz. Rev. Stat. § 14-2710. Accordingly, a conveyance to to a grantor’s “heirs, heirs at law, next of kin,” or similar language are valid and does not create a reversionary interest in the grantor. Id.

CALIFORNIA

In California, a trust is generally revocable unless it explicitly states that it is irrevocable. See Cal. Prob. Code § 15400 (“Unless a trust is expressly made irrevocable by the trust instrument, the trust is revocable by the settler.”); see also In re B~-H~, 348 B.R. 512, 519 (2006) (“Under California law, a trust is revocable unless it is expressly stated to be irrevocable.”). Further, even if the trust explicitly states that it is irrevocable, the trust is revocable if the grantor is the sole beneficiary of the trust. See Levy v. Crocker-Citizens Nat. Bank, 14 Cal. App. 3d 102, 105, 94 Cal.Rptr. 1, 3 (Cal. App. Ct. 1971) (“It is conceded that if a trustor is the sole beneficiary of a trust, he may revoke it even though by its terms the trust is irrevocable”); Bixby v. California Trust, 33 Cal. 2d 495, 497 (1949) (“Where the trustor is the sole beneficiary no problem arises of defeating the trust against the trustor's wishes”) (citing Rest. (2d) of Trusts § 339 (“If the settlor is the sole beneficiary of a trust and is not under an incapacity, he can compel the termination of the trust;” commenting that this rule stands “even though it is provided in specific words by the terms of the trust that the trust shall be irrevocable”)); Cal. Prob. Code § 15404 (if the settlor and all beneficiaries of a trust consent, they may compel modification or termination of the trust).

California enacted law abolishing the doctrine of worthier title. ^[10] See Cal. Prob. Code § 21108. Thus, a trust provision conveying a remainder interest to the grantor’s “heirs” or “next of kin” is valid and does not result in a reversionary interest to the grantor. Id.; Cal. Prob. Code § 15205 (a trust requires a beneficiary; this requirement is met if there is a beneficiary or class of reasonably ascertainable beneficiaries or the class is sufficiently described so as to determine that some person meets the class description); POMS PS 01825.006.E (PS 12-122, California Trust Law: “Heirs” or “Heirs at Law”as Residual Beneficiary). Likewise, the identification of an individual or category of people (for instance, a “spouse” or “living issue”) would also establish a remainder interest. See C.I.R. v. Goodan, 195 F.2d 498, 499 n.1 (9th Cir. 1952).

HAWAII

Under Hawaii law, a trust is irrevocable unless the grantor explicitly retains the power to revoke the trust. Miller v. First Hawaiian Bank, 61 Haw. 346, 349 n.5 (1979) (citing Restatement (2d) of Trusts § 331 (generally, a settlor cannot modify the trust if he did not expressly reserve a power of modification)). But where the grantor is the sole beneficiary of a trust, it is revocable even if the trust says it is irrevocable. See Cooke Trust Co. v. Lord, 41 Haw. 198 (1955) (citing Weymouth v. Deleware Trust Co., 45 A.2d 427, 428 (Del. Ch. 1946) (Generally, “where the settlor is the sole beneficiary and is not under an incapacity, he may compel the termination of the trust”)); Security Pacific Bank Washington v. Chang, 80 F.3d 1412, 1415 (9th Cir. 1996) (Hawaii follows the majority rule on self-settled spendthrift trusts); Rest. (2d) of Trusts § 339 (“If the settlor is the sole beneficiary of a trust and is not under an incapacity, he can compel the termination of the trust”).

Hawaii enacted a statute abolishing the doctrine of worthier title. See Haw. Rev. Stat. § 560:2710. Language in a trust describing the beneficiaries of a disposition as the grantor’s “heirs,” “heirs at law,” “next of kin” or similar language does not create a reversionary interest in the grantor. Id.; see also In re K~’s Trust Estate, 47 Haw. 610, 620 (1964) (recognizing the term “heirs of the body” as establishing a remainder interest).

NEVADA

In Nevada, a trust is irrevocable unless the grantor expressly retains the power to revoke it. See Nev. Rev. Stat. § 163.560 (2013); Nicosia v. Turzin, 97 Nev. 93, 94 (1981) (per curiam) (“unless a power of revocation is specifically provided for in the trust, revocation will not be permitted”). “Such a trust shall, under no circumstances, be construed to be revocable for the reason that the settlor and the beneficiary is the same person.” Nev. Rev. Stat. § 163.560.2.

Nevada does not require any specific language for creating a remainder interest; however, the trust must have a reasonably ascertainable beneficiary or class of beneficiaries. ^[11] Nev. Rev. Stat. § 163.006; see also Hannam v. Brown, 114 Nev. 350, 356 (Nev. 1998) (construing trusts in a manner effecting the apparent intent of settlors).

II. VALIDITY OF ORAL TRUSTS

Generally, a writing is not necessary to create an enforceable inter vivos trust. See Rest (3d) of Trusts § 20. However, pursuant to the Statute of Frauds, a writing is necessary for the a trust involving real property. Id. This rule is followed by all states in Region IX, as detailed below.

ARIZONA

Arizona recognizes oral trusts for personal property, but requires a written trust for real property. See O’Brien v. Bank of Douglas, 17 Ariz. 203, 207 (Ariz. 1915) (recognizing oral trust for personal property); Ariz. Rev. Stat. § 14-10407 (“a trust need not be evidenced by a trust instrument, but the creation of an oral trust shall be established only by clear and convincing evidence and the terms of the oral trust shall be established by a preponderance of the evidence); Hall v. World Sav. and Loan Ass’n, 189 Ariz. 495, 504 (Ariz. 1977) (an oral trust for land falls “within the statute of frauds,” i.e., it requires written document(s) setting forth with reasonable definiteness the trust property, beneficiaries, and purpose).

CALIFORNIA

California recognizes oral trusts for personal property, but requires a written trust for real property. See Cal. Prob. Code § 15207 (recognizing oral trusts for personal property; stating that an oral declaration is not sufficient to create a trust of real property); Cal. Prob. Code § 15206 (a trust in relation to real property must be evidenced by a written instrument signed by either the trustee or the settlor).

HAWAII

Hawaii recognizes oral trusts for personal property, but requires a written trust for real property. See Wery v. Pacific Trust Co., 33 Haw. 701 (1936) (recognizing oral trust for personal property); Teixeira v. Teixeira, 37 Haw. 64 (1945) (a trust for land falls within the “statute of frauds,” i.e., it requires a writing of its terms).

NEVADA

Nevada recognizes oral trusts for personal property, but requires a written document for trusts including real property. See Nev. Rev. Stat. § 163.009 (recognizing oral trust for personal property); § 163.008 (requiring trust for real property to be created by written instrument or operation of law; such a trust may be recorded in the county where the real property is located); Hardy v. U.S., 918 F.Supp. 312, 317 (D.Nev. 1996) (under Nevada law, a trust for real property is not valid unless “created by operation of law or evidenced by a written instrument[.]”) (citing Nev. Rev. Stat. § 163.008). A written trust may be in electronic form. See Nev. Rev. Stat. § 163.0095 (effective 2001).

This opinion examines whether or not the trust in question (established in 1996) is considered irrevocable under Georgia law. A trust is a countable resource for SSI purposes if an individual has legal authority to revoke the trust and then use the funds to meet his/her food or shelter needs, or if the individual can direct the use of the trust principal for his/her support and maintenance. The revocability of a trust and the ability to use the trust principal is determined by the terms of the trust and/or State law. In this case, the trust identifies the claimant's "heirs" as the residual beneficiary. Under Georgia law, a trust must specify a particular person or entity as the residual beneficiary. The reference to "heirs" in this trust is too indefinite to create a residual interest under Georgia law thus making the trust revocable and a countable resource for SSI purposes.

OVERVIEW

You asked whether an unfunded, or “empty,” Hawaii trust established under Section 1917(d)(4)(A) of the Social Security Act (the Act) is a valid trust for the purpose of determining Supplemental Security Income (SSI) eligibility. As discussed below, we conclude that an empty trust is not a valid trust under Hawaii law.

BACKGROUND

In general, when determining an individual’s eligibility for SSI, all assets in a revocable trust established by the individual, as well as those assets in an irrevocable trust which could be paid to the individual, will be considered a resource. See Act § 1613, 42 U.S.C. § 1382b(e)(3); POMS SI 01120.201(D). Assets in a trust may be excluded as a resource, however, if a statutory exception applies. Section 1917(d)(4)(A), 42 U.S.C. § 1396p(d)(4)(A), provides for one such exception, commonly known as the Medicaid payback trust or “special needs trust.” To qualify for the exception, a trust must:

1. be established with the property of an individual under age 65 who is disabled;

2. be established for the benefit of such individual by a parent, grandparent, legal guardian, or court; and

3. provide that, on the death of the individual, any funds remaining in the trust will be used to reimburse the state for Medicaid payments made for the benefit of the individual during his lifetime.

Act § 1917(d)(4)(A); POMS SI 01120.203(B)(1).

Where a parent or grandparent creates such a trust, the parent or grandparent must either (1) create a “seed” trust, i.e., establish a trust using a nominal amount of his or her own funds, after which the disabled individual may transfer his or her own funds to the trust, or (2) create an empty or dry trust, if state law permits, into which the competent disabled adult’s funds can be placed. POMS SI 01120.203(B)(1)(f).

Thus, if Hawaii law recognizes the validity of an empty trust, trusts created in this manner may be eligible for the Medicaid payback trust exception. Conversely, if Hawaii law does not recognize the validity of an empty trust, such trusts will not qualify for the exception.

DISCUSSION

Hawaii has not directly addressed whether it would recognize an empty Section 1917(d)(4)(A) trust. Hawaii recognizes special needs trusts and Section 1917(d)(4)(A) trusts, but does not specify whether such trusts may be unfunded. See, e.g., Haw. Rev. Stat. § 490:9-109(d)(16) (acknowledging Section 1917(d)(4)(A) trusts); Nacino v. Chandler, 71 P.3d 424, 427 n.5 (Haw. Ct. App. 2002) (discussing creation of exemption under 42 U.S.C. § 1396p(d)(4)(A); Lee v. Transamerica Occidental Life Ins. Co., 2006 WL 906135, at *1 (Haw. Ct. App. 2006) (analyzing a “special needs trust”).

As a general rule, however, Hawaii does not recognize empty trusts as valid. Longstanding Hawaii case law requires trust property for the creation of a trust. See Kinney v. Robinson, 30 Haw. 246, 253-54 (Haw. 1927) (listing “a definite subject,” or property, as an essential element of a valid trust). In addition, a trust must use language specific enough to adequately identify trust property. See id. (providing that to constitute a valid trust, the trust terms, including the “subject-matter” of the trust (trust property), must be “reasonably certain”); Black’s Law Dictionary 870 (8th ed. 2004) (defining “subject-matter” as the “corpus,” i.e., trust property).

Recent case law reiterates the fundamental requirement that a trust must contain property in order to be valid. See Trust Created Under Will of D~, 869 P.2d 1339, 1344 n.4 (Haw. 1994) (listing “a definite subject” as an essential element of a valid trust). Although Hawaii has not enacted a statute addressing the issue, the case law indicates that an empty trust would not be considered valid under Hawaii law.

CONCLUSION

Hawaii does not recognize empty trusts as valid. Consequently, such trusts would not qualify for the exception to counting set forth in Section 1917(d)(4)(A).