[benboccio]

Arno plans to establish a spendthrift trust naming Ford and Sims as life income beneficiaries, Trip as residuary beneficiary, and Bing as trustee. Arno plans to fund the trust with an office building.

Assume that an enforceable trust was formed. Sims has the following personal creditors:
1. Bank holding a home mortgage note deficiency judgment
2. Judgment creditor as a result of an automobile accident

To which of these creditors can Bing pay Sims’s share of trust income?

The answer is neither. However I don’t see why because a spendthrift trust allows the trustee to make decisions on how the trust funds may be spent. Anyone have any real insight on this one?

[LedgerL0ver]

A spendthrift trust is set up for someone who is terrible with money. There are conditional rules as to when they get the proceeds. So not only are the funds protected from the beneficiarys frivolous spending, but the money is also protected from creditors.

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[benboccio]

In simplified terms:

What's stopping a trustee from paying the creditors if he/she decided to?

[demarcon]

A spendthrift trust is in place to stop them from using the money to pay creditors or allowing them to pledge it as collateral. The trustee wouldn't allow them to do it.

[benboccio]

Appreciate the responses but neither addressed what would stop the TRUSTEE from paying the creditors, which is what the original question is asking.

Bing is the trustee
“To which of these creditors can Bing pay Sims’s share of trust income?”

The operative word is CAN. Why can't Bing, the trustee pay the creditors?

[demarcon]

Because the trustee has a fiduciary responsibility to the grantor of the trust to fulfill his wishes and the purpose of the trust. If he were to pay those debts it would go directly against the wishes of the grantor and he would be breaking his fiduciary duty.

[benboccio]

I think the question is just poorly worded to make the point that creditors can't touch the trust. A trustee has the power to use the income as he sees fit. Just because it's a spendthrift trust, doesn't mean the trustee couldn't or even would be going against their fiduciary duty by using the income to pay off creditors. It actually seems to me like a responsible action on the part of the trustee.

[Author]

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