Reproduced from Estate Planning Magazine (Aug., Sept. and Oct. 2004)
© 2003-2004 by Mark Merric and Steven J. Oshins. All rights reserved. 1
The Effect of the UTC on the
Asset Protection of Spendthrift Trusts
by: Mark Merric & Steven J. Oshins
With the spiraling divorce rate of over fifty percent in the United States, as well as
the increasing number of lawsuits, creditor protection is often the most important
objective of our clients. An irrevocable trust set up by someone other than a beneficiary
provides the ultimate in creditor protection. As the asset protection maxim goes -- "If you
don't own it, nobody can take it away from you."1 Historically, the general rule has been
that the creator of the trust can dictate who may receive the beneficial enjoyment of the
property and the extent and circumstances under which this enjoyment may be obtained.
As a result, unless trust property is distributed to a beneficiary, it will generally be
protected from the beneficiary's creditors.
Unfortunately the Uniform Trust Code (“UTC”) may have significantly weakened
the asset protection that was formerly available for discretionary trusts in states that have
adopted it. Because of the issues surrounding the UTC, planners should consider moving
all trusts and the underlying liquid assets intended to be creditor-protected out of UTC
The general rule is that through accepted legal remedies a creditor of a debtor
stands in the shoes of the debtor and may exercise any property or other right that the
debtor may exercise. So does this mean that a creditor may attach a beneficiary’s trust
interest or force the trust to make a distribution to the creditor in satisfaction of a
beneficiary’s debt? Further, could a creditor lien or attach a remainder interest? If this is
the general rule, does an estranged spouse have more rights to attach a beneficial interest
under domestic relations law than an ordinary creditor? Does a discretionary trust
provide stronger creditor protection than a support trust? This article will answer these
questions and others.
Creditor Remedies Prior to the UTC
To the extent a trust beneficiary has a “property right” certain “exception
creditors” may attach the beneficiary’s interest. These “exception creditors” are
generally the following exception creditors specifically listed in the Restatement Second
(1) Alimony and child support;
(2) Necessary expenses of a beneficiary (i.e., governmental claims for medical
(3) Governmental claims.2
There is a fourth exception creditor listed in the Restatement Second - a creditor
for expenses incurred to preserve a beneficial interest (i.e., attorneys’ fees).3 However,
most states have not adopted this fourth exception creditor.
Exception creditors are allowed to attach the beneficial interest of a trust pursuant
to the distribution standard in the support trust (e.g., health, education, maintenance and
support). 4 Since the beneficiary has a right to force a distribution pursuant to the
distribution standard, the exception creditor also succeeds to such a right. In this respect,
the exception creditor is able to reach part or all of the assets necessary to satisfy the
creditor’s claim directly from the trust property.
Current Distribution Analysis – Non-UTC State
In general, a current distribution interest is an interest where the trustee may make
a mandatory distribution, a discretionary distribution, or a distribution based on a support
standard. Generally, if the beneficiary does not have a property interest (i.e., an
enforceable right5), a creditor has absolutely no right of recovery. The theory is that if
the beneficiary does not have a right of recovery that he may enforce, the creditor can
obtain no more rights than the beneficiary has over the trust assets. This rule that
prevents recovery by a creditor is not dependent upon spendthrift provisions. Rather, a
creditor cannot compel the trustee to pay anything because the beneficiary cannot compel
a payment.6 Therefore, so long as the governing law of the trust is not that of a state that
has adopted the UTC, absent control issues, or, in a few states, certain divorce issues, if a
beneficiary has no property interest, the analysis is generally concluded and the creditor
has no right of recovery.
However, not all state courts use a direct property analysis in determining whether
a creditor may reach a beneficial interest. Rather, some courts will examine whether the
beneficiary’s interest has an ascertainable value.7 In essence, the analysis is the same. If
the beneficiary’s interest has no value, then there is no interest or enforceable right that a
creditor may attach.
On the other hand, if the beneficiary has a property interest, then the trust must be
reviewed to determine whether it contains a spendthrift clause. Almost all trusts have
such a clause. In general, a spendthrift clause protects a beneficiary’s interest from
attachment by a creditor.
However, under the Restatement Second, there are four types of creditors that
may attach a beneficiary’s interest regardless of the spendthrift provisions. These
creditors are referred to as exception creditors. Most states have adopted three of the four
exception creditors. The exception creditor for expenses required to protect a beneficial
interest (i.e., attorney fees) has not been adopted by many states.
In addition, even if a the creditor is not an exception creditor, or even if the trust
is a discretionary trust, if the beneficiary holds too much control over the trust, a creditor
will still be able to attach to the beneficiary’s interest and reach the trust’s assets. For
example, if the beneficiary is the sole trustee and sole beneficiary of a trust, then the trust
assets may be available to a creditor.8
With respect to alimony and child support claims, a former spouse and minor
children are exception creditors, and the former spouse may attach a current beneficial
interest of a support trust on behalf of minor children. However, except for states that
have adopted the UTC or Restatement Third, a spouse generally does not have any claim
against a discretionary trust.
Remainder Interest Analysis - Non-UTC State
The remainder interest analysis varies from the current distribution analysis in a
few key areas. First, similar to a current beneficial interest, one must first determine
whether the interest is a property interest. However, the Restatement Second adopts a
different approach than that which is used in the current beneficial interest analysis. If an
interest is created for a group of persons, it is inseparable and a creditor cannot reach it.9
For example, a dynasty trust is a trust in which an interest never vests in anyone. Hence,
an interest in a dynasty trust would not be a property interest and would be “inseparable”
as defined in the Restatement Second.
The Restatement Second also provides that if an interest of a trust “is so indefinite
or contingent that it cannot be sold with fairness to both the creditors and the beneficiary,
it cannot be reached by his creditors.” 10 If this is the case, a creditor should not be able
to recover from the trust. However, if this is not the case, then the analysis shifts to
whether the trust has a spendthrift provision.
Similar to the analysis for a current distribution interest, spendthrift protection
must be analyzed within the confines of the four exception creditors. Here again, a
former spouse is an exception creditor who may attach a remainder interest for child
support or alimony.
The control issue analysis is substantially identical for a current beneficial interest
and a remainder interest. Even if a the creditor is not an exception creditor or even if the
trust is a discretionary trust, if the beneficiary holds too much control over the trust, a
creditor will still be able to attach to the beneficiary’s interest and reach the trust’s assets.
In the domestic relations area, courts have granted a former spouse greater rights
than an ordinary creditor or an exception creditor. As noted above, a spouse is an
exception creditor, but only for the purposes of alimony or child support. However, in
many states, courts have allowed a spouse to attach a remainder interest as part of a
Support Trusts Versus Discretionary Trusts
A trust is generally drafted as either: (1) a mandatory distribution trust, (2) a
support trust (i.e., distributions pursuant to an ascertainable standard), or (3) a
discretionary trust. Additionally, since many attorneys tend to combine the language of a
support trust with the language of a discretionary trust, a handful of states have created a
fourth type of trust called a hybrid trust.
1. Mandatory Distribution Trust
A mandatory distribution trust is a trust in which the trustee must make the
distribution required by the terms of the trust agreement. The trustee may not withhold or
accumulate a mandatory distribution. Some examples of mandatory distribution trusts
include marital deduction trusts, grantor retained annuity trusts, charitable remainder
trusts and charitable lead trusts. The trusts in these examples require mandatory
distributions in order to qualify for certain tax benefits. However, many trusts are drafted
with mandatory distributions even though there is no tax reason to do so. This often
makes some or all of the trust assets available to the beneficiary’s creditors and divorcing
spouses for no reason but that the trust scrivener was using a trust “form” which was
inadequate for planning purposes.
2. Support Trust
A support trust is created by the settlor to support one or more beneficiaries. A
support trust directs the trustee to apply the trust’s income and/or principal as is necessary
for the support, maintenance, education, and welfare (or other standard) of a
beneficiary.11 The beneficiary of a support trust can compel the trustee to make a
distribution of trust income or principal merely by demonstrating that the money is
necessary for the beneficiary’s support, maintenance, education, or welfare,12 or whatever
other standard is contained in the trust.
Following is an example of language creating a support trust:
“The Trustee shall make distributions of income or principal for the
beneficiary’s health, education, maintenance and support.”
Implicit in this support language are two components: (1) a command that the trustee
“shall” make distributions, and (2) under what standard or circumstances (i.e., health,
education, maintenance and support) distributions are to be made.
A support trust typically includes mandatory language that the trustee “shall”
make distributions.13 However, there are a few cases in which a trust has been classified
as a support trust even though the discretionary word “may” or the words “discretion,”
and even “sole discretion,” were used instead of the mandatory word “shall.” The
standard for distributions often contains words such as “health, education, maintenance
and support.” However, the standard may also include terms such as “comfort and
welfare.”14 A support trust gives the trustee discretion only with respect to the time,
manner, or size of distributions needed to achieve a certain purpose, such as support of
For example, in McElrath v. Citizens and Southern Nat. Bank, the language “[t]he
Trustee shall use a sufficient amount of the income to provide for the grandchild’s
support, maintenance and education” [emphasis added] was held to be a support trust. 16
Similarly, in In re Carlson’s Trust, the language “[t]he trustee shall pay…[to the settlor’s]
daughters such reasonable sums as shall be needed for their care, support, maintenance,
and education” [emphasis added] was determined to be a support trust.17 Finally, in
McNiff v. Olmsted County Welfare Dept., the court decided that the language “[t]he
trustee shall administer the trust estate for the benefit of my wife and my said daughter,
or the survivor of either, and the trustee shall apply the income in such proportion
together with such amounts of principal as the trustee, it its discretion, deems advisable
for the maintenance, care, support and education of both my wife and my said daughter”
[emphasis added] created a support trust.18
3. Discretionary Trust
A discretionary trust allows the trustee complete and uncontrolled discretion to
make allocations of trust funds if and when it deems appropriate.19 Because the trustee is
given such broad powers, the beneficiary can only compel the trustee to distribute funds
if it can be shown that the trustee is abusing its discretion by failing to act, acting
dishonestly, or acting with an improper purpose in regard to the motive in denying the
beneficiary the funds sought.20
Following is an example of language creating a discretionary trust:
“The Trustee may distribute as much or more of the net income and
principal as the Trustee, in its sole and absolute discretion, deems
appropriate to or among any beneficiary or beneficiaries. The Trustee, in
its sole and absolute discretion, at any time or times, may exclude any of
the beneficiaries or may make unequal distributions among them.”
Implicit in this magical discretionary language are three components: (1) a discretionary
statement that the trustee “may” make a distribution, (2) the trustee has the “sole and
absolute” discretion to determine whether a distribution shall be made and, if so, how
much shall be distributed, and (3) the ability to exclude distributions from other
A discretionary trust generally uses permissive language such as the word “may”
instead of the word “shall.”21 However, as noted below, there are a few cases where the
courts have held that the word “shall” when combined with the words “sole and absolute”
discretion still resulted in a discretionary trust.22
The permissive word “may” is still generally further qualified by granting the
trustee unfettered discretion using words such as “sole and absolute discretion,” “absolute
and uncontrolled discretion” or “unfettered discretion.” In some cases, explicit language
that permitted the trustees to exclude or discriminate between beneficiaries when making
distributions was a major factor the court considered when determining whether a trust
was a discretionary trust.23
For example, in In re Matter of Leona Carlisle Trust, the court determined that
the language “[t]he Trustee shall expend such sums from the principal of the trust for the
benefit of [appellant]…as the trustee, in its full discretion, deems advisable,” [emphasis
added] and it “is expressly understood the trustee is under no obligation to make any
expenditures,” created a discretionary trust.24 Furthermore, the trust language provided
that the trustee shall not make any distributions for appellant’s “basic necessities as
provided or to be provided by any governmental unit,” and the trustee “shall make
distributions only to supplement and not to supplant such public assistance available for
maintenance, health care or other benefits.”25
Similarly, in Zeoli v. Commissioner of Social Services, the court found that the
language “[t]o pay or apply so much of the net income to or among either one or both of
my daughters as shall be living from time to time during the term of such trust, and in
such proportions and amounts as my trustee shall determine in his absolute and
uncontrolled discretion...” [emphasis added] created a discretionary trust. The language
in that case continued, “[m]y trustee shall not be required to distribute any net income of
such trust currently and may, in his absolute and uncontrolled discretion, accumulate any
part or all of the net income of such trust, which such accumulated net income shall be
available for distribution to the beneficiaries as aforesaid.26 [Emphasis added.]
As yet another example, in Simpson v. State Dept. of Social and Rehabilitation
Services, the trustees were required to distribute trust income and assets to any one or
more of this group of beneficiaries as the trustees “in their absolute discretion” may
determine from time to time. The instrument further provides that “the Trustees shall
have the absolute discretion, at any time and from time to time, to make unequal
payments or distributions to or among any one or more of said group and to exclude any
one or more of them from any such payment or distribution.”27 [Emphasis added.]
4. Hybrid Trust or “Discretionary Support Trust”
There are three states and possibly a fourth (Iowa, Nebraska, North Dakota, and
possibly Pennsylvania) that have taken the position that there is an additional type of trust
– a “discretionary support trust”. This type of trust includes elements of both a support
trust and a discretionary trust.28 A discretionary support trust is created when the settlor
combines the explicit discretionary language “with language that, in itself, would be
deemed to create a pure support trust.”29 Under the case law of these three or four states,
the hybrid trust covers the middle ground between a classic support trust and a classic
discretionary trust.30 If a trust is neither a traditional support trust nor a traditional
discretionary trust, these courts have followed one or the other of the following two
approaches. They have either (a) allowed extrinsic evidence to determine the
classification as either a discretionary or a support trust, or (b) required the trustee to
carry out the purposes of the trust based on a “good faith” standard and required the
trustee to make minimal distributions.
For an example of a court allowing extrinsic evidence to make the determination,
in Bohac,31 the provisions of the trust allowed the trustee to distribute principal as the
“Trustee may deem necessary” for the beneficiary’s “support, maintenance, medical
expenses, care, comfort, and general welfare.” [Emphasis added.] The court noted that
the trust provisions created a hybrid trust, but decided that extrinsic evidence must be
admitted to determine the settlor’s intent with respect to whether the trust was a support
trust or a discretionary trust. Even though the court noted that the words “comfort and
general welfare” may result in the classification of the trust as a discretionary trust, the
court held the trust was a support trust.
As another example, in Kryzsko v. Ramsey County Soc. Services,32 the trustee was
given sole discretion to invade trust principal for the “proper care, maintenance, support,
and education” of the beneficiary. The court held that the trustee did not have unfettered
discretion and must follow a standard of providing proper support. The court noted that
unlike a discretionary trust, which fixes no standard on the trustee’s absolute discretion as
to whether to pay income or principal to a beneficiary, a support trust gives the trustee
discretion only as to the time, manner, and size of the payments needed to achieve a
certain purpose such as support of a beneficiary.
As yet another example, in Lang v. Com., Dept. of Public Welfare,33 the terms of
the trust provided that “the trustee shall pay the income periodically to or for the support,
maintenance, welfare, and benefit of my son or may, in the trustee’s discretion, add part
or all of the income or principal to be invested as such.” [Emphasis added.] The trust
continued, “[t]he trustee may distribute such part of the income not necessary for the
support of my son, in equal shares to my children.” After looking at extrinsic evidence
suggesting that it was the settlor’s intent to preserve trust assets, particularly where public
benefits were available to the beneficiary, the court held that the trust was discretionary.
In contrast, in Smith v. Smith,34 the Nebraska Supreme Court held that the trustee
of a discretionary support trust can be compelled to carry out the purpose of the trust in
good faith. The trust provided that “[T]he trustee shall pay over to, or for the benefit of
one or more of the living members of a class composed of my son Richard and his issue,
so much of the net income and principal of the trust as the Trustee shall deem to be in the
best interests of each such person, from time to time. Such distributions need not be
made equally unto all members of the class. In determining the amount and frequency of
such distributions, the Trustee shall consider that the primary purpose of the trust is to
provide for the health, support, care, and maintenance of my son Richard during his life.”
[Emphasis added.] The court determined that the above language constituted a “hybrid
trust” where the trusts were not only created to support the primary beneficiary, but also
to grant the trustee greater liberty in decision-making than that of a trustee of an ordinary
A few courts have held that the effect of a discretionary support trust is to
establish the minimal distributions a trustee must make in order to comport with the
settlor’s intent of providing basic support, while retaining broad discretionary powers in
the trustee.35 In these cases, the courts held that the minimum distribution may be
reached by a creditor.36
In Bureau of Support in Dep’t of Mental Hygiene & Correction v. Kreitzer, 37 the
Ohio Supreme Court, without using the term “hybrid trust,” found the trust language to
create neither a purely discretionary trust nor a purely support trust. Therefore, the court
held that the trust should be governed by a “reasonableness” standard that would not
permit the beneficiary to become destitute. The result was that the governmental agency
could recover against the trust assets under the exception for necessary expenses of a
beneficiary. Further, the Ohio Supreme Court seemed to lean further toward becoming a
“hybrid trust” state when it stated in a subsequent case that “[a] trust conferring upon the
trustees power to distribute income and principal in their absolute discretion, but which
provides standards by which that discretion is to be exercised with reference to the needs
of the trust beneficiary for education, care, comfort, or support is neither a purely
discretionary trust nor a strict support trust.”38
This Ohio Supreme Court ruling is particularly troubling because it used a
“reasonableness” standard. For over a hundred years, the strong majority view has been
that the appropriate standard is bad faith or abuse (i.e., the trustee acts dishonestly with an
improper motive or fails to act).39 Further, the purpose of a discretionary trust is to
prevent the courts from reviewing the “sole and absolute” discretion of the trustee. With
a discretionary trust, the settlor has chosen to put his faith in the trustee rather than the
courts. However, a support trust takes the opposite approach. With a support trust, the
settlor wants the beneficiary to have a right to enforce the ascertainable trust terms if the
trustee does not follow the standard drafted into the trust agreement.
By using a standard less than that of bad faith and closer to reasonableness, the
Ohio Supreme Court has now given the beneficiary of this hybrid type of trust the right to
sue the trustee for unreasonably not making a distribution or not distributing enough.
Furthermore, this legal right will most likely be a property right (i.e., a right enforceable
under state law) that can cause the creditor to stand in the shoes of the beneficiary.
What is a Property Interest?
Most courts first determine whether a beneficiary has a property interest under
state law. 40 Rather than using a property analysis, some courts will find that the
beneficiary’s interest has no ascertainable value. 41 In essence, the analysis is the same.
There is no interest or enforceable right that a creditor may attach because under this
analysis the beneficial interest has no value.
Assuming the property analysis approach is used, the initial step in determining
whether a creditor may recover against an interest in a trust is to determine whether the
interest is a property interest under state law.
If the beneficiary’s interest in the trust is not a property interest, then the analysis
proceeds directly to whether the beneficiary held too much control over the trust,
followed by any state nuances under domestic relations law. 42 On the other hand, if the
beneficiary holds a property interest, does the creditor stand in the shoes of the
beneficiary, and may the creditor enforce the beneficiary’s property right? The answers
to these questions depends upon whether the trust has a spendthrift provision and how
much creditor protection the spendthrift provision provides.
State law determines what constitutes a property interest. While state law may
vary, “property” is generally defined as everything that has an exchangeable value or
which goes to make up wealth or estate.43 An “equitable interest” in trust property is
regarded as a property interest of the same kind as trust res and is more than a mere chose
in action. 44 Simply, there are two methods for determining whether something
constitutes property: (1) something that may be sold or exchanged, or (2) an enforceable
With regard to the first type of property, such property is freely alienable, and as
such has a fair market value that may be determined by a market price. However,
beneficial interests in trusts are generally restricted by spendthrift provisions that prevent
the transfer of any beneficiary’s interest. In this respect, there is no fair market value
because the property cannot be sold. On the other hand, under the second test, in many
situations, a beneficiary has an enforceable right (i.e., a property interest). For example,
with support trusts, a current beneficiary has a right to sue the trustee to force a
distribution pursuant to a standard in the trust. Also, if a beneficiary has a vested
remainder interest, the beneficiary will most likely receive property at some time in the
Distribution Standard and the Current Beneficial Interest
Almost all courts will classify a beneficiary’s interest as being (1) a mandatory
distribution, (2) a support distribution, or (3) a discretionary distribution. However, as
previously noted, there is a problem when a scrivener conflicts the elements of a
discretionary trust with those of a support trust.
When the terms of a trust require a mandatory distribution to be made, there is no
question that the beneficiary has an enforceable right to this distribution. The beneficiary
unquestionably may sue the trustee to force a distribution. Therefore, a fixed interest,
which is an interest that creates an enforceable right in the beneficiary, is a property
interest. For example, in In re Question Submitted by the United States Court of Appeals for
the Tenth Circuit, the Tenth Circuit held that a beneficiary’s future right to receive $1,000
per month was a property interest.45
With respect to a mandatory distribution right, the creditor is not attaching the
trust’s assets. Rather, the creditor is attempting to attach to the mandatory distribution
stream.46 Since this interest is a property right, the only question is whether a spendthrift
provision provides some type of protection for a mandatory distribution received from a
The common law purpose of a support trust is to provide support for a beneficiary
based on a “standard.” The most common standard used is that of health, education,
maintenance and support. Such a support standard must be definite enough for a court to
be able to determine whether a trustee is following the support standard. In this respect,
magical words such as health, education, maintenance and support have been determined
by courts to be definite. Words such as comfort and welfare may or may not be
sufficiently definite depending on state law. On the other hand, words such as joy and
happiness are not capable of interpretation on a reasonable basis, and may easily result in
a trust not being classified as a support trust.
As previously noted, if a trust is classified as a support trust, a beneficiary of a
support trust can compel the trustee to make a distribution of income or principal merely
by demonstrating that the money is necessary for the beneficiary’s support, maintenance,
education, or welfare,47 or whatever other standard is used in the trust agreement. In other
words, a beneficiary has a right to sue the trustee for failing to make a distribution from a
support trust. If a beneficiary has the right to sue the trustee, the beneficiary most likely
has a property interest under state law.48 If this is the case, does the creditor stand in the
beneficiary’s shoes and have the power to sue the trustee to force the payment of the
beneficiary’s debt? Absent spendthrift provisions, this would definitely be the case.
Therefore, whether a creditor (including an estranged spouse) may recover must be
determined under the analysis in the spendthrift portion of this article.
3. Discretionary Interest
Under the Restatement Second and almost all of the case law to date, a
discretionary beneficiary has no contractual or enforceable right to any income or
principal from the trust, and therefore the beneficiary cannot force any action by the
trustee.49 This is because a court may only review a discretionary trust for abuse and bad
faith. There is no reasonableness standard of review by a court with respect to a
discretionary trust. Further, the discretionary interest is not assignable.50 In this respect,
a discretionary beneficiary’s interest is generally not classified as a property interest.
Rather, it is nothing more than a mere expectancy.51 If a beneficiary has no right to force
a distribution from a trust, then the same rule applies to the beneficiary’s creditor. The
creditor may not force a distribution.
In this respect, whether the assets of a discretionary trust are protected does not
depend on spendthrift provisions with respect to the current beneficial interest. As
discussed in the spendthrift section of this article, the asset protection features of a
discretionary trust are much stronger than those of a support trust or a mandatory
distribution trust that must rely on spendthrift protection.
If a judge does not classify a trust with conflicting language as either a
discretionary trust or a support trust, the case law in Iowa, Nebraska, North Dakota, and
possibly Pennsylvania, has indicated that it is a hybrid trust. In general, a beneficiary of a
hybrid trust only has the right to sue the trustee for a minimal distribution.52 This being
the case, the hybrid trust does not provide the same degree of protection as a
discretionary trust. Rather, it is more similar to a support trust than a discretionary trust,
and an analysis of the spendthrift provisions must be done to determine whether the trust
assets are protected.
A remainder interest has a slightly different analysis than that of a current
beneficial interest. While divorce cases tend to use the word “property” in determining a
remainder interest,53 the rule under the Restatement Second, Section 160 requires a
determination as to whether there are “inseparable interests.” In essence, the “inseparable
interest” rule functions quite similar to the property analysis used for a current beneficial
interest. Further, the Restatement adds to the analysis an “indefinite” or “contingent”
interest analysis as another hurdle a creditor will most likely need to cross. If the
remainder interest is not a property interest, or if a creditor cannot overcome the
indefinite or contingent interest rule, then the analysis proceeds directly to whether the
debtor/beneficiary retained too much control.
According to the Restatement Second, if a beneficial trust interest is “so indefinite
it cannot be reached by creditors.”54 There are two parts to this rule. First, is the
remainder interest indefinite? Second, can the remainder interest be sold with fairness to
both the creditors and the beneficiary?
1. Indefinite and Contingent Interests
A vested interest is not a contingent interest. A vested interest is one where the
debtor/beneficiary or the debtor/beneficiary’s estate will take at some point of time in the
future. The clear majority rule appears to be that a vested remainder interest may be sold
at a judicial foreclosure sale unless it cannot be sold with fairness to both the creditors
and the beneficiary, or unless the trust contains spendthrift provisions.55 These cases
follow the general property rule that a remainder interest in property may be sold even
though it is a future interest.56
Many estate planners consider a remainder interest to be a contingent interest
where either (1) one party must outlive the other party in order to take, or (2) the trust
property is subject to complete divestment due to a special power of appointment.
However, Restatement Second, Section 162, Illustration 1 indicates that the mere fact that
a child must survive a parent in order to take the trust property is not too contingent, and,
therefore, unless the remainder interest can be sold with fairness to both the creditors and
the beneficiary, absent spendthrift protection, a creditor would be able to judicially
foreclose on the remainder interest.57
2. Sold With Fairness
Would a willing buyer or willing seller pay much for an interest in trust that is
contingent on a child outliving his parent? Most likely, the interest would be highly
discounted. However, what if the interest was subject to a special power of appointment
that could divest the child of the entire remainder interest? In this case, a purchaser at a
judicial foreclosure sale would likely pay little for the interest when compared to the
amount that would ultimately be received by the remainder beneficiary.
There are very few reported cases where anyone other than a former spouse
attaches the remainder interest.58 Most creditors do not attempt to judicially foreclose on
a remainder interest because in almost all cases the “sold with fairness rule” would apply.
Even if the “sold with fairness rule” does not apply, several states have passed state
statutes preventing the forced sale of remainder interests.59
A spendthrift provision is a provision in a trust agreement that provides that the
beneficiary cannot sell, pledge or encumber his beneficial interest, and a creditor cannot
attach a beneficiary’s interest. At common law, the purpose of a spendthrift trust was to
protect a beneficiary other than the settlor of the trust from his own spending habits. The
idea was to provide for someone who could not provide for himself, and to keep such
beneficiary from becoming dependent on public assistance. Therefore, if a spendthrift
clause was added to a trust, the common law developed a legal principle that a creditor
could not recover from the beneficiary’s interest.60 If the mere insertion of such a clause
could protect a beneficiary’s interest, why not include such a provision in almost all trusts?
Today, this is in fact the case.61
A beneficiary of a discretionary dynasty trust does not need to rely on a
spendthrift provision because neither the current distribution interest nor any subsequent
interest is a property interest under state law. Therefore, in a non-UTC state, neither the
beneficiary nor the creditors of the beneficiary have any right to force a distribution from
the trust. However, as a matter of course, scriveners should nearly always include
spendthrift provisions.62 This is especially true should the UTC become law.
However, the same analysis is not true for a trust that is classified as a support
trust. In this case, beneficiaries in many states may force a distribution from the trust
pursuant to the standard provided in the trust instrument. So the question becomes, can a
creditor stand in the shoes of the beneficiary and force such a distribution? The language
of a spendthrift provision on its face generally prohibits a creditor from doing so.
However, under what circumstances will courts make exceptions to spendthrift protection?
Except for certain types of creditors, a spendthrift provision protects the trust’s
assets from attachment.63 The Restatement Second, Section 157 carves out the following
four key exceptions64 to spendthrift protection, where a creditor may attach the assets of a
1. Alimony or child support - Almost all, if not all, recent cases hold that a spouse
may reach a beneficiary’s interest for alimony or child support.65 Therefore, if a trust is
classified as a support trust, an estranged spouse may almost always reach the assets of
the trust to satisfy a maintenance or child support claim. However, this exception does
not apply to a division of marital property pursuant to a divorce.
2. Necessary services or supplies rendered to the beneficiary - Most cases in this
area arise when a federal or state institution is attempting to attach a beneficiary’s interest
for medical services rendered on behalf of the beneficiary.66 Further, in almost all of
these cases, the drafting attorney conflicted the magical words of a discretionary trust
with those of a support trust.
3. Services rendered and materials furnished that preserve or benefit the
beneficial interest in the trust - These are generally claims by attorneys for fees
incurred to either sue the trust or protect a beneficial interest. Fortunately, while the
other three exceptions of the Restatement Second are almost universally applied by the
states, this one is not. In other words, attorneys are frequently not allowed to recover
their fees from the trust.
4. A claim by the U.S. or a state to satisfy a claim against a beneficiary -
Generally, these are tax liens. The Internal Revenue Service may often reach a
beneficiary’s interest in a support trust for payment of a tax lien.67 In First Northern
Trust Co. v. Internal Revenue Service,68 the court noted that it is a well established legal
principle that the income from a spendthrift trust is not immune from federal tax liens
notwithstanding any state laws or recognized exemptions to the contrary.69
In summary, there are four exception creditors that can reach a support trust’s
assets to satisfy their claim. In a non-UTC state, these exception creditors, including the
federal government, would have no claim against the trust assets if it had been drafted as
a discretionary dynasty trust.
Conflicting Distribution Language
As noted above, with respect to the current distribution interest, a discretionary
trust generally provides the strongest asset protection features because the discretionary
distribution interest is generally not a property interest under state law. If a beneficiary
does not hold a property interest, then a creditor cannot attach it.
Unfortunately, there is a tension between the asset protection features of a
discretionary trust and who can be a trustee without possible estate tax inclusion issues.
Generally, clients wish to have a family member, such as a spouse or child, serve as the
trustee. If distributions are limited to an ascertainable standard, there are times when a
spouse/beneficiary or a child/beneficiary may serve as the sole trustee of a trust without
an estate tax inclusion issue.70 On the other hand, if the spouse or child is the sole trustee
and a beneficiary of a discretionary trust, the spouse or child will be considered to hold a
general power of appointment, thereby resulting in estate inclusion.71
Many estate planners attempt to get the best of both worlds. These planners
would like a trust that would be considered discretionary for state law purposes so that a
creditor of a beneficiary cannot attach the trust. They also would like the trust to be
deemed to have an ascertainable standard for estate and gift tax purposes, giving the
client greater selection over who can be a trustee. In an attempt to accomplish both of
these objectives, these planners draft distribution language that uses magical words from
both a support trust and a discretionary trust. For example, the trust document may read:
“The Trustee may, in his sole and absolute discretion, make distributions
of income or principal based on health, education, maintenance and
support to any beneficiary.”
The magical discretionary words “may,” and “discretion” have been conflicted with
the trust support words “health, education, maintenance and support.” Furthermore, the
discretionary language allowing the trustee to make distributions to one beneficiary and
not the others has been implied.
Naturally, the Service would like to argue that this language creates a discretionary
trust because the distribution trustee would have a general power of appointment at death
and therefore also have estate inclusion under IRC §2041.72 Conversely, the taxpayer
would like to argue that distributions are pursuant to an ascertainable standard in order to
avoid the estate inclusion issue.
Furthermore, if it is a governmental agency that is the creditor of the beneficiary
and is seeking to recover payment from the trust, the governmental agency will argue that
distributions are pursuant to an ascertainable standard and that the trust should be
classified as a support trust. The client will argue that the distributions are discretionary.
The court will almost always decide that the trust is either (1) a “support” trust (i.e.,
ascertainable standards) or (2) a discretionary trust.
As noted, almost all non-UTC courts will decide one way or the other, but not
both ways.73 By attempting to accomplish the best of both worlds, the estate planner
typically does more damage than good. The planner creates either a possible estate
inclusion issue or allows a creditor to recover from the trust assets. For this reason, the
trust scrivener should avoid conflicting trust language and should draft either a purely
discretionary trust or a support trust (i.e., distributions based on ascertainable
In the few states that recognize a hybrid trust,75 the hybrid trust is by definition a
conflicting language trust. The problem with this is that most of the states require the
trustee to make a minimal distribution for the beneficiaries’ needs. This being the case, a
creditor for necessary expenses of the beneficiary most likely becomes an exception
creditor.76 Further, what about child support and alimony? One could easily argue that
child support is a necessary expense. Similarly, are taxes a necessary expense of a
beneficiary? At present, the answers to these questions are unknown. However, in the
few states that recognize a hybrid trust, it seems that such a trust provides little more
protection than that of a support trust.
Absent spendthrift provisions, a beneficiary may transfer the remainder interest,
and a creditor may attach such interest. 77 This would include an estranged spouse as well
as any other creditor.78
On the other hand, if spendthrift provisions are present, ordinary creditors may
not attach a remainder interest. This is true even in bankruptcy court. The Federal
Bankruptcy Court is required to look to state law to apply property rules.79 For example,
in In Re Neuton, a California state statute provided that spendthrift provisions protected
75% of the remainder interest.80 The debtor’s ordinary creditor could not recover against
the amount protected by state law. However, if the creditor is one of the four exception
creditors and the “sold with fairness” rule does not apply, the creditor may attach and/or
judicially foreclose and sell the remainder interest. 81
Control and Dominion Issues
In the event a creditor cannot attach the trust assets under one of the
aforementioned theories of recovery, then a creditor may attempt to recover under the
theory that the debtor/beneficiary held too much control. The purpose of a spendthrift
provision is to protect the beneficiary from his own improvidence. If the sole beneficiary
is the sole trustee, he cannot protect himself from his own improvidence. Therefore, in In
re Bottom, the spendthrift provision protection was not upheld since the sole beneficiary
was the sole trustee,82 and the creditor was able to reach the assets of the trust. On the
other hand, at least two courts have held that the beneficiary/trustee did not control a trust
in which the beneficiary was a co-trustee and there were multiple beneficiaries.83
Many attorneys draft trusts with an ascertainable standard for distributions and the
primary beneficiary (i.e., the child) as the sole trustee of the trust. The trust has both the
primary beneficiary and the primary beneficiary’s children as beneficiaries. To date, the
authors of this article are only aware of one court that has directly addressed this issue,
and a second court that mentioned the issue as dicta.
In In re Schwen, the court mentioned that if one of the beneficiaries was the sole
trustee, the trustee/beneficiary’s control regarding making distributions was still limited
by a fiduciary duty to other beneficiaries. Therefore, the trustee/beneficiary would not
have too much control.84 It should be noted that in Schwen there were actually two
trustees, and the court mentioned the sole trustee situation purely as dicta. Fortunately, in
In re Coumbe, in a review of a bankruptcy case, the court provided further guidance in
this area when it held that a sole beneficiary could serve as the sole trustee so long as
there were different remainder beneficiaries.85
Nuances under State Domestic Relations Law
Until recently, in the event of divorce, almost all asset protection planners thought
that a remainder interest was free from division of marital property. Most Colorado estate
planners went into shock when the Colorado Supreme Court handed down the In re
Balanson decision.86 The Colorado Supreme Court had held that the appreciation on a
vested remainder interest subject to complete divestment was marital property eligible for
equitable division. Colorado law holds that an inheritance is exempt from the definition
of marital property, and any appreciation on inherited property is considered marital
property. Prior to this, Colorado had held that remainder interests in trusts were
The disturbing facts of Balanson began when the daughter married. A few years
later, Mom and Dad create the standard estate plan that creates a marital trust and credit
shelter trust upon the death of the first spouse. Several years later, Mom dies and the
first $1 million of her assets funds the credit shelter trust, and the remainder funds the
marital trust. Dad was the sole trustee of both trusts. All income of the marital trust was
required to be distributed to Dad. However, distributions of income of the credit shelter
trust and any corpus of either trust were based on an ascertainable standard. Dad was in
good health and may easily live many more years. Further, Dad had a testamentary
general power of appointment over the marital share that would allow him to completely
extinguish the daughter’s interest should he desire by appointing all of the trust property
to his son. Several years after Mom dies, Daughter files for divorce. Son-in-law claims
that Daughter’s vested remainder interest is marital property eligible for division in the
The daughter’s remainder interest was contingent since she must outlive her
father. Also, the daughter’s interest was subject to complete divestment because her dad
may exercise his special power of appointment solely in favor of his son. However, the
Colorado Supreme Court ruled that even if a vested remainder interest is subject to
complete divestment, such an interest is still a property interest that can be valued for
the purpose of division in a divorce. The logic behind the decision is that the Court
frequently values interests that are hard to value such as retirement plans and businesses
and that, therefore, each side needs to merely bring in their experts since it’s only a
In Balanson, the Colorado case cited two other cases – Davidson v. Davidson (a
Massachusetts case) and Trowbridge v. Trowbridge (a Wisconsin case)88 and held that a
vested remainder interest subject to complete divestment is eligible for marital property
division. So at first blush, following in Massachusetts’ footsteps, the Colorado Supreme
Court appears to be crossing new legal ground. However, this does not quite appear to
be the case. Rather, it appears that this is a national trend rather than just a few states
with isolated occurrences. In fact, the authors believe that this issue may be similar to
what has happened with retirement plans. Approximately forty years ago, most courts
held that retirement plans were not divisible and therefore not subject to division in the
domestic relations context. However, now all states value retirement plan interests and
readily divide them in divorce settlements.
The following courts, listed alphabetically by state, have found a remainder
interest to be a marital asset eligible for division in a divorce:
(1) Alaska - Burrell v. Burrell89 - In 1975, the Alaska Supreme Court found a
vested remainder interest subject to division.
(2) Colorado - Balanson v. Balanson90 - In 2001, the Colorado Supreme Court
held that any appreciation on a vested remainder interest subject to
complete divestment was eligible for division as a marital asset.
(3) Connecticut - Carlisle v. Carlisle 91 - In 1994, the Superior Court of
Connecticut found remainder interests in a credit shelter trust, marital trust,
and an irrevocable trust to be marital property.
(4) Indiana – Moyars v. Moyars92 - In 1999, the Court of Appeals of Indiana
distinguished Loeb v. Loeb.93 Loeb had held that a contingent remainder
interest was too remote to be considered marital property because if the
husband predeceased his mother the entire trust property would pass to the
husband’s siblings. In Moyars, the husband owned a vested one-third
remainder interest in real estate. The remainder interest was not
contingent on him outliving his mother’s life estate. Rather, the remainder
interest would pass to his estate if he predeceased his mother. Therefore,
the Court of Appeals held that a vested remainder interest was marital
(5) Massachusetts - Davidson v. Davidson94 - In 1985, the Massachusetts
Supreme Court held that neither uncertainty of value nor inalienability of a
husband’s vested remainder interest in a discretionary trust were sufficient
to preclude division.
(6) Montana - Buxbaum v. Buxbaum95 - In 1984, the Montana Supreme Court
held that a husband who had benefited from his future interests, which
were vested interests, by using them as collateral, could not construe them
as a mere expectancy and preclude them from property division.
(7) New Hampshire - Flaherty v. Flaherty96 - In 1994, the New Hampshire
Supreme Court held that an anti-alienation clause and circumstances that
the defendant’s contingent remainder interest will not have value until his
last parent dies did not preclude the treatment of the interest as marital
(8) North Dakota - van Ossting v. van Ossting97 - In 1994, the North Dakota
Superior Court held that when the present value of the husband’s vested
credit trust was subject to contingencies and was too speculative to
calculate, the proper method of distribution was to award the wife a
percentage of future payments.
(9) Ohio - Martin v. Martin98 - In 1978, the Ohio Supreme Court found that a
future interest, whether contingent or executory, is alienable.
(10) Oregon - Benston v. Benston99 - In 1983, the Oregon Appeal Court found
that a vested, as well as a contingent, remainder interest is subject to
(11) Vermont - Chikott v. Chilkott100 - In 1992, the Vermont Supreme Court
held that techniques of actuarial valuation of pension interests were
applicable to determining the present value of the husband’s vested,
defeasible trust interest for the purposes of property division at dissolution.
(12) Wisconsin - Trowbridge v. Trowbridge 101 - In 1962, as dictum the
Wisconsin Supreme Court held that remainder interests in trust subject to
conditions of survivorship, depletion of corpus, and spendthrift clause,
were part of a marital estate subject to division at divorce.
To date, twelve states have held that a vested remainder interest is property that is
eligible for division in a divorce. Some of these states require the property to be vested,
but most of them hold that a vested remainder interest, even if subject to complete
divestment, is a marital asset. In this respect, the Balanson case is not the shock that
many people first suspected. Rather, it appears to be a common finding in many courts
when all or part of a remainder interest is considered marital property.
One may ask why more states have not found a vested remainder interest to be
property eligible for division. First, as noted above, a handful of states still follow the
theory that a vested remainder interest is not divisible, or that it is a mere expectancy, or
that it is too remote to be classified as marital property. However, the primary reason
more states have not found that a remainder interest is marital property is because in most
states an inheritance, including any appreciation on the inheritance, is separate property.
On the other hand, many of the aforementioned states that have concluded that a
remainder interest is marital property have state statutes that in general are based on one
of the following types:
(1) An inheritance is classified as a marital asset.
(2) An inheritance is classified as separate property. However, the
appreciation on an inheritance is considered a marital asset.
(3) There is a test using certain factors for dividing all property owned by
either spouse at the time of dissolution. More specifically, based on the
state statute, the judge has complete authority to give the separate property
of one spouse to the other spouse for various reasons such as the length of
the marriage, the contributions to the marriage of the receiving spouse, the
needs of the spouse who has custody of the children, and the lower income
level of the receiving spouse.
In the states that hold that a remainder interest is property eligible for division on
the dissolution of a marriage, an estranged spouse has greater rights than an ordinary
creditor. Under the Restatement Second, an ordinary creditor cannot generally attach the
remainder interest until it is distributed because the interest is either contingent or subject
to a spendthrift provision.102 However, as noted above, a spouse is an exception creditor
for purposes of child support and alimony, not with respect to the division of marital
Furthermore, it appears from the older cases that the general rule was that a
spouse attempting to receive a property settlement has a standing no better than that of
any other creditor.104 Unfortunately, in all but one of the cases cited above, the courts did
not discuss the spendthrift issue. In one case, Davidson v. Davidson, however, the
Supreme Court of Massachusetts did mention the spendthrift provisions. Later in the
opinion, without discussing the spendthrift provisions, the Court stated that it rejected the
contention that “the content of estates of divorcing parties ought to be determined by the
wooded application of the technical rules of the law of property. We [the Supreme Court
of Massachusetts] think an expansive approach, within the marital partnership concept, is
appropriate.”105 Therefore, as applied to remainder interests, a former spouse in many
states has greater rights to a remainder interest than an ordinary creditor.
In light of these issues, it is shocking that more estate planners do not create
discretionary multigenerational dynasty trusts106 as a matter of course. Presumably, this
is either because most attorneys’ formbooks do not have this option, or simply because
many attorneys do not strive to do the best job possible for their clients. Regardless, it
should be inexcusable for a planner not to recommend a multigenerational trust, and if
the client chooses not to use one, then at a minimum the attorney should make note in the
client’s file that this option was discussed, and probably should obtain a signed waiver
from the client.
Discretionary Distributions Imputed in Computing Alimony
One appellate court in Massachusetts initially appeared to have completely
ignored virtually all case law on discretionary trusts. The Massachusetts Court of
Appeals held that the amount of alimony could be based on imputing income from a
discretionary trust.107 As noted above, a discretionary trust is not even a property interest,
and the trustee may make distributions in the trustee’s “sole and absolute” discretion. A
beneficiary has no right to sue for a distribution except under a bad faith standard.
Therefore, how could it be possible that income would be imputed to a beneficiary who
could not even sue for a distribution? This case only begins to make sense in light of the
radical changes that are adopted by both the Uniform Trust Code and Restatement Third
when they are compared to current trust law.
The Uniform Trust Code
Presently, nine states - Kansas, Maine, Missouri, Nebraska, New Hampshire, New
Mexico, Tennessee, Utah and Wyoming - have enacted the UTC. The UTC is under
review in numerous other states. The District of Columbia has also enacted the UTC. On
the other hand, Arizona enacted the UTC in May of 2003. Within a year, due to the
public outcry and the estate planning attorneys’ strong opposition to the UTC, it was
repealed by unanimous vote of both the House and the Senate. The UTC was also
defeated in the Colorado legislature and killed in a Senate Committee in Oklahoma
despite the support of both Bars. After intensive study in Texas, Minnesota, and Indiana,
some minor portions of the UTC were adopted, but most of the provisions of the UTC
were rejected. Further, the Texas Bar is currently drafting anti-Restatement (Third) of
Trusts legislation. One of the principal reasons the UTC was repealed in Arizona and is
receiving strong resistance in several other states is the radical departure that the UTC
and Restatement Third take from common law regarding the traditional asset protection
afforded by discretionary dynasty trusts as well as spendthrift trusts in general.
For well over four hundred years, trust law has been based on the property
concept that a donor may make a gift subject to whatever restrictions he wishes. While
there are some limited public policy exceptions to this rule, such as restrictions on
marriage, the common law has generally allowed trusts to follow the settlor’s intent. The
UTC and the Restatement Third are both built on the opposite assumption.
As related to discretionary trusts, the UTC and Restatement Third are built on the
assumption that the beneficiaries should have a much greater right to challenge the
settlor’s wishes through litigation than prior law has allowed. In addition to changing the
fundamental property assumption behind trust law, both promulgations overturn one
hundred twenty-five years of well-established trust law by equating the asset protection
features of a discretionary trust with those of a support trust. For this reason, in the area
of traditional asset protection through non-self-settled trusts, should a state legislature
adopt the Uniform Trust Code or should a court decide to follow the Restatement Third, a
completely separate analysis of asset protection is provided below.
Understanding the UTC
The UTC and the Restatement Third are interrelated. In fact, the comments from
the UTC have over one hundred specific references to the Restatement Third’s text,
comments, and reporter notes. Additionally, the comment under Section 106 of the UTC
implies that the Restatement Third should even be given a preference over common law
when interpreting the UTC.
Furthermore, the committees of both the Restatement Third and the UTC worked
hand in hand to draft several areas of new trust law. While there are minor differences in
the asset protection issues between the two pronouncements, for the most part the two
pronouncements read as though they were written by the same authors. With respect to
traditional asset protection, the Restatement Third is for the most part not a restatement of
trust law at all. Rather, it is a new and untested approach to trust law. The same is also
true for Article 5 of the UTC, which appears to be an abbreviated version of the
Restatement Third, Sections 50 and 56-60.108
Finally, if one is to read Article 5 of the UTC without reading corresponding
Restatement Third Sections, one might easily conclude that the UTC is incredibly
confusing and poorly drafted. However, if one reads the Restatement Third prior to
reading Article 5 of the UTC, even though it is still poorly drafted, Article 5 of the UTC
begins to make some sense. Therefore, in order to understand Article 5 of the UTC, the
reader may wish to first read the aforementioned Sections of the Restatement Third.
The Cornerstone of the Common Law Discretionary Trust
Under the common law, a court would only interfere with a trustee’s “sole and
absolute” discretion of a discretionary trust if the trustee (1) acts dishonestly, (2) acts
with an improper motive, or (3) fails to use his or her judgment.109 A beneficiary had
little if any standing to sue for a distribution or question the amount of a distribution
unless the beneficiary could prove one of the above factors was present. In almost all
states, there was no reasonableness or good faith standard for a discretionary trust that
used qualifying adjectives such as the trustee’s “absolute,” “unlimited” or “uncontrolled”
discretion. In fact, Section 187 of the Restatement Second held that such qualifying
adjectives dispensed with the standard of reasonableness.
Since the beneficiary had such a high threshold to meet, the beneficiary had
virtually no enforceable right (i.e., property interest). This lack of an enforceable right is
the fundamental cornerstone for the asset protection behind a discretionary trust. The
principle is simple. A creditor cannot compel the trustee to pay anything because the
beneficiary cannot compel payment. 110 This is the common law asset protection
difference between a support trust and a discretionary trust. A support trust has a
reasonableness judicial standard of review, while the judicial review of a discretionary
trust is typically limited to the trustee acting dishonestly, acting with an improper motive,
or failing to use his or her judgment (i.e., “bad faith” standard).
Ohio – A Tale of What Not to Do
The following analysis of Ohio law demonstrates the beginning of the problems
that occur with the judicial standard of review is dropped to Ohio’s possible definition of
abuse, good faith or reasonableness. In Ohio, it appears that the standard of review of a
discretionary trust has gradually been shifting from a bad faith type of concept to more of
a reasonableness standard. In 1945, the Ohio Supreme Court held that “[w]here the terms
of a trust provided that the trustee shall pay to a beneficiary only so much of the income
and principal, or either, as the trustee in his uncontrolled discretion shall see fit to pay,
the beneficiary cannot compel the trustee to pay him any part of the income or
principal.”111 This would mean that the beneficiary would have little, if any, standing in
court. However, by 1955 it appears that the standard was shifting to one of “good faith”
Adding more confusion, in 1962, in Culver v. Culver113 the Appellate Court stated
that “[o]f course the courts have supervision over discretionary trusts; but the sole inquiry
is whether the discretion exercised by the trustee has been abused; if the bank, in the
exercise of good faith, failed to exercise its discretion, or having exercised it, was guilty
of bad faith,114 then the courts can interfere, but not before.” Here the Court appears to
be stating that both a good faith standard and an abuse standard apply.
In 1968, in a supplemental needs case, the Ohio Supreme Court held that even if a
discretionary distribution standard utilized the qualifying adjectives of “sole and
absolute” discretion, if the distribution language was coupled with an enforceable
standard, it was an abuse of discretion if the trustee did not make minimum distributions
to a destitute beneficiary.115 The Court did not discuss what abuse standard Ohio had
adopted or what category of abuse into which the above situation would fall. Rather, the
Court merely held that the fact pattern constituted abuse. Further, the Court held that
because of the enforceable standard, the trust was neither purely a discretionary trust nor
purely a support trust. The standard was “care, comfort, maintenance, and general wellbeing.”
The result of this analysis was that the governmental agency was able to recover
directly from the trust assets by forcing a distribution pursuant to the standard. This
would not be the case in almost all common law states that retain the
In 1978, the Ohio Supreme Court extended the concept of Kreitzer to allow a
spouse to recover for child support from a discretionary trust that was coupled with a
standard. Further, the Ohio courts for the most part consistently continued to apply the
Kreitzer analysis, with the result that Medicaid and governmental agencies would recover
from a discretionary trust’s assets.116 The unreported 1997 and 2001 cases of In the
Matter of Trust Created by Item III of Will of Zemuda117and Buoscio v. Estate of
Buoscio118 added further confusion to what review standard Ohio has for a discretionary
trust. In these decisions, the courts used a standard of abuse requiring that the trustee act
unreasonably, unconscionably, or arbitrarily. Finally, in 2001, an Ohio Appellate Court
held that a discretionary trust was an available resource and it was proper that the
beneficiary was denied Medicaid eligibility.119 The Ohio Appellate Court reasoned that
the beneficiary had an enforceable right under Kreitzer. As such, the Ohio Department of
Human Services was correct in denying benefits since the discretionary trust was an
available resource under Ohio’s definition of abuse.
In the 1989 case, In re Estate of Winograd,120 the Ohio Appellate court used a
“reasonableness” standard in reviewing a discretionary trust. Unlike the Kreitzer line of
cases where the Ohio definition of “abuse” or the “good faith” standard allowed the
governmental Medicaid and special needs creditors to either recover from the trust or
deny benefits, Winograd attacks the basis of a beneficiary controlled trust.121
One of the key ideas behind a beneficiary controlled trust is that the reason a
beneficiary is happy to receive his share of an inheritance in trust is because should the
beneficiary need the funds, the trustee may distribute all of the trust funds to him. In
other words, the trustee may completely exclude any other beneficiaries from any
distributions, and all amounts may be paid to the primary beneficiary if needed. In
applying a reasonableness standard, the Ohio Appellate Court held that the trustee abused
his discretion by distributing all of the income to the primary beneficiary.
The Court came to this conclusion even though the trust had specific language
stating that the trustee could make distributions of income “to or for the benefit of any
one or more to the exclusion of any one or more” of the beneficiaries, and the trustee
should consider the primary beneficiary first and the primary beneficiary’s descendants
second in making distributions. Unfortunately, Ohio is not alone in destroying one of the
fundamental aspects of a beneficiary controlled trust. The Restatement Third also takes
the same position as the appellate court in Winograd.122
Uniform Trust Code and Restatement Third
Both the UTC and the Restatement Third expand the approach used in Ohio that
caused so many problems from an asset protection perspective. The UTC makes it clear
that a “good faith” standard applies, and the Restatement Third makes it clear that a
“reasonableness” standard applies.
While comment b of the Restatement Third provides that “judicial intervention is
not warranted merely because the court would have differently exercised its discretion,”
Section 50, comment b provides that “a court will not interfere with a trustee’s exercise
of a discretionary power when that exercise is reasonable and not based on an improper
interpretation of the terms of the trust.”123 The comment continues, “[a] court will also
intervene if it finds the payments made, or not made, to be unreasonable as a means of
carrying out the trust provisions.” [Emphasis added.]
The UTC does not impose a reasonableness standard. Rather, Section 814(a)
provides a good faith standard. According to that Section, “[n]otwithstanding the breadth
of discretion granted to a trustee in the terms of the trust, including the use of such term
as “absolute,” “sole,” or “uncontrolled,” the trustee shall exercise a discretionary power
in good faith in accordance with the terms and purposes of the trust and the interests of
the beneficiaries.” The Restatement Third, Section 50, comment c has a similar
construction where it states that words such as “absolute,” “unlimited,” “sole” and
“uncontrolled” discretion “are not interpreted literally.” Rather, the trustee must still
accomplish the purposes of the discretionary power. In essence, both the UTC and the
Restatement Third use a relatively equivalent standard of review by a court, and this
standard of review provides a much lower threshold for a beneficiary than the bad faith
standard of prior law.124
When drafting discretionary trusts, many attorneys also include a broad standard
for making distributions. According to the Restatement Third, an abuse of discretion
depends upon “the proper construction of any accompanying standards, and on the
settlor’s purpose in granting the discretionary power.” In other words, if a discretionary
trust states that the trustee may make distributions in the trustee’s sole and absolute
discretion for health, education, maintenance, support, comfort, general welfare,
happiness and joy, each separate standard listed may well need to be examined to
determine whether the trustee’s discretionary decision to distribute or not to distribute
On the other hand, the Restatement Third also goes to great lengths to prevent
attorneys from drafting out of this problem. Many attorneys suggest that a discretionary
trust should not even include a distribution standard. By eliminating any distribution
standard, it would be unlikely that a judge would conclude that the trust is anything other
than a discretionary trust since the judge could not mistake the trust as a support trust.
Further, it would be unlikely that a judge would question the trustee’s distribution
decisions. Unfortunately, Section 50, comment b of the Restatement Third provides “[i]t
is not necessary, however, that the terms of the trust provide specific standards in order
for a trustee’s good-faith decision to be found unreasonable and thus constitute an abuse
of discretion.” If a standard is omitted, the court will still apply a reasonableness or
good-faith judgment “based on the extent of the trustee’s discretion, the various
beneficial interests created, the beneficiaries’ circumstances and the relationships to the
settlor, and the general purposes of the trust.”125
Once the threshold for the judicial standard of review has been reduced to
reasonableness or good faith, in almost all cases, the beneficiary should have an
enforceable right to a distribution. This being the case, may a creditor stand in the
beneficiary’s shoes under the UTC or the Restatement Third? Even if a creditor may not
stand in the beneficiary’s shoes, similar to the Metz case in Ohio, may a governmental
agency deny benefits by considering a discretionary trust as an available resource? Also,
would the discretionary trust be considered an equitable factor in determining child
support, alimony, and possibly an equitable division of marital property? Finally, should
a beneficiary be imputed income from a trust for the purpose of computing child support
and alimony? All of these issues are discussed in the following material.
Asset Protection for Discretionary and Support Trusts Now the Same?
The traditional trust analysis has explained in detail the enhanced degree of asset
protection provided by a discretionary dynasty trust. The asset protection under common
law afforded by a discretionary dynasty trust is based on a property analysis (i.e., whether
there is an enforceable right). On the other hand, for a support trust, the asset protection
is based on spendthrift protection, subject to the four exception creditors.
In addition to changing the standard of review, both the UTC and the Restatement
Third again change one hundred twenty-five years of established trust law by eliminating
the discretionary trust property analysis. The provisions in the Restatement Third make it
clear that asset protection will be based solely on the same spendthrift protection
analysis.126 In other words, there is no property analysis for a discretionary trust under
the Restatement Third or the UTC.127 For a number reasons, this is quite a dramatic
change from an asset protection perspective.
First, third-party Medicaid trust planning or special needs trust planning is based
on meeting the definition of a discretionary trust under state law. Whereas a
governmental agency, as an exception creditor, may recover from a support trust, a
governmental agency cannot recover from a discretionary trust. Unfortunately, under the
UTC and the Restatement Third, the change of the standard of judicial review, equating a
discretionary trust to a support trust, and the probable expansion of exception creditors as
discussed below, may soon make it possible for a governmental medical agency to
recover directly from a discretionary trust.
Second, claims of the U.S. or state governments, including the Internal Revenue
Service, have never been enforced against a discretionary trust. Again, this is because a
beneficiary has no right of recovery. Therefore, a creditor does not receive greater rights
than the beneficiary. Third, except for the one Massachusetts Court of Appeals case,
which appears to have relied on a draft of the Restatement Third for its holding, a former
spouse has no right of recovery against a discretionary trust, even for alimony or child
support. Fourth, attorney fees incurred on behalf of a beneficiary suing a discretionary
trust for a distribution would most likely not be recovered from the trust. Therefore,
under the Restatement Third and the UTC, virtually all of the asset protection of a
discretionary trust is lost, and the discretionary trust is forced to rely on the much lesser
protection afforded by a spendthrift trust.128
Continuum of Discretionary Trusts More Protective?
One might argue that under the UTC and Restatement Third all trusts should now
receive greater asset protection because all trusts are now on a “continuum of
discretionary trusts.” However, this conclusion is incorrect. The reason that a creditor
could not force a distribution from a discretionary trust was because the beneficiary could
not do so. This was because the beneficiary had very little standing in court under the
bad faith review standard. 129 As previously discussed, under the UTC the review
standard has been changed to good faith, and under the Restatement Third the review
standard has been changed to reasonableness. The issue is not what title (i.e., the term
“discretionary”) is assigned to a trust. The issue is whether the beneficiary has an
enforceable right if the beneficiary can force a distribution. Unfortunately, the case law
from Ohio proves this to be the case. Once the beneficiary has an enforceable right (i.e.,
a property interest), the following concerns are issues:
l What remedies are available to exception creditors?
l What remedies are available to ordinary creditors?
l Whether governmental aid will be denied because the trust will be considered
an available resource?
l Whether the beneficiary’s interest will be considered either marital property
or a factor for equitable division in the divorce context?
l Whether income will be imputed to a beneficiary for the purpose of
computing child support or alimony?
Expansion of Exception Creditors?
Similar to the Restatement Second, both the UTC and the Restatement Third have
a list of exception creditors. Some have argued that, at least in the short term, since the
UTC list of exception creditors is smaller than that of the Restatement Second, the UTC
is more protective for support trusts (but not for discretionary trusts). In the short term,
this may be the case. However, since the Restatement Second was promulgated almost
fifty years ago, only three of the four exception creditors have been generally adopted by
state courts. On the other hand, when legislators have been given the ability to determine
exception creditors, the magnitude of the exception creditors appears to be much more
expansive than the judicial exception creditors. Therefore, this greater asset protection
for a support trust may last for only a relatively short period of time.
A. Restatement (Second) of Trusts
The Restatement Second lists the following four exception creditors:
1. Alimony and child support;
2. Reasonable needs of a beneficiary;
3. Expenses to preserve a beneficial interest; or
4. Any federal or state claim.
The exception for expenses to preserve a beneficial interest (i.e., attorney fees for
a beneficiary, or an exception creditor standing in the shoes of the beneficiary suing the
trust) never gained much acceptance in the state courts. It is for this reason, in the fiftyyear
period since its promulgation, only three of the four exception creditors have gained
acceptance by the state courts.
B. Uniform Trust Code
From an asset protection perspective, at first glance it appears that the UTC is an
improvement over the Restatement Second since it reduces the number of exception
creditors to three exception creditors. The exception creditor for “necessary expenses of
the beneficiary” appears to have been deleted.
1. “...a beneficiary’s child, spouse, or former spouse who has a judgment or
court order against the beneficiary for support or maintenance, or
2. a judgment creditor who has provided services for the protection of a
beneficiary’s interest in the trust, may obtain from a court an order
attaching present or future distributions to or for the benefit of the
3. “A spendthrift provision is unenforceable against a claim of this State or
the United States to the extent a statute of this State or federal law so
However, for the most part, this is not really the case. The UTC has actually
combined most of the necessary expenses of a creditor cases (i.e., Medicaid and special
needs trust cases) with the third exception for claims by the federal or state government.
Whereas exception creditors had no claim against a discretionary trust under common
law, all exception creditors would be allowed to directly attach the assets of a
discretionary trust under the UTC or Restatement Third. Furthermore, future exception
creditors may now be added both judicially and legislatively.
At first glance, the UTC appears to be an improvement for Medicaid and special
needs trusts over the common law of most states. This is because a state or federal
government must now pass a statute in order to recover from a Medicaid or special needs
trust. Governmental agencies that provide benefits are no longer automatically
considered an exception creditor (i.e., the necessary expenses of a beneficiary under the
Once the state government agencies realize that they no longer may recover from
this type of trust, it may be only a matter of time before the state or federal government is
able to convince the state legislators to add them as an exception creditor. At this time, a
state or federal governmental agency would be able to recover from all trusts in a UTC
state, including third party discretionary Medicaid or special needs trusts. In almost all
states, the UTC is retroactive. It applies to all trusts regardless of whether they were
created before or after the effective date of the UTC.
Under UTC §504(d), a beneficiary is never limited “to maintain a judicial
proceeding against a trustee for an abuse of discretion or failure to comply with a
standard for distribution.” The term “abuse” has been redefined to mean “good faith”
under the UTC or “reasonableness” under the Restatement Third. Therefore, even with
respect to a discretionary trust, the beneficiary now has a right to reach the underlying
assets pursuant to a good faith or reasonableness standard.
Under §541 of the Bankruptcy Code,131 upon the filing of a bankruptcy, the
bankruptcy estate receives all of the assets of the debtor. Due to the decrease in the
review standard to good faith, all beneficiaries of a discretionary trust have an
enforceable right that is also most likely considered to be a property interest under state
law. Therefore, this discretionary beneficial interest is now part of the bankruptcy estate.
Further under §541, the bankruptcy trustee stands in the shoes of the bankrupt for all
purposes. Does this mean that the bankruptcy trustee may now exercise the beneficiary’s
rights to force a distribution pursuant to UTC §504(d)? Under §541(c)(1), any contract
clause or other arrangement calling for the termination of rights upon the filing of a
bankruptcy may be voided by the Bankruptcy Court. Prior to the UTC and the
Restatement Third, this was not an issue with a discretionary trust because the beneficiary
of a discretionary trust did not have a right to force a distribution.
Furthermore, the list of exception creditors may easily be expanded under the
UTC. For example, for many years, the trial bar has attempted to create an exception for
tort creditors. The Mississippi Supreme Court actually adopted this view in Sligh v. First
National Bank of Holmes County.132 Approximately one year from the Supreme Court
rendering this landmark decision, the Mississippi legislature specifically overturned the
Mississippi Supreme Court by statute due to the anticipated loss of trust business that
would migrate to other states with more favorable trust legislation.133 Under the UTC,
the state legislature may easily do this statutorily by simply appending an unnoticed
exception as part of any other bill that passes through the legislature.
In addition to the tort creditor exception, what if the federal bankruptcy code one
day references the UTC exception creditor list? Section 503(c) provides that “[a]
spendthrift provision is unenforceable against a claim of this State or the United States to
the extent a statute of this state provides.” The federal bankruptcy code could take
advantage of this loophole by enacting a statute such as, “[t]he Federal Bankruptcy
Trustee is an exception creditor pursuant to Section 503(c) of any State that has adopted
this provision of the Uniform Trust Code?”
All a creditor need do is file an involuntary bankruptcy against the debtor,
assuming the requirements for such a filing are met, and the creditor would have easy
access to the trust assets. In essence, this would mean all judgment creditors - not just
alimony, child support, necessary expenses of the creditor, federal claims, state claims
and tort creditors - but anyone who had a debt greater than $11,625.134 Should federal
bankruptcy law ever allow recovery against a trust in a UTC state, there is virtually no
asset protection provided by a spendthrift provision. In other words, all credit card
companies as well as any other creditors could easily recover from any spendthrift trust
through this possible bankruptcy end run approach.
Many asset protection attorneys have indicated that, with a spendthrift trust, all
the trustee need do to avoid attachment and still support the beneficiary is to pay the
debtor/beneficiary’s expenses directly rather than making a distribution to the
beneficiary.135 Both the UTC and Restatement Third end this possibility. Section 501 of
the UTC provides that a creditor may attach “present or future distributions to or for the
benefit of the beneficiary.” Section 60, comment c and Illustration 4 of the Restatement
Third provide that, “[i]f the trustee has been served with process…, the trustee is
personally liable to the creditor for any amount paid to or applied for the benefit of the
beneficiary in disregard of the rights of the creditor.
The inability of the trustee to pay the expenses of a beneficiary is much more
expansive that one might think. This is how most special needs trusts pay beneficiaries’
expenses so that a distribution is not considered an available resource. Also, the
interpretation of UTC §501 may lead to the unfortunate conclusion that all creditors may attach
present or future distributions. This is because UTC §501 provides that “[t]o the extent a
beneficiary’s interest is not protected by spendthrift provisions, the court may authorize a
creditor or assignee of the beneficiary to reach the beneficiary’s interest by attachment of
present or future distributions to or for the benefit of the beneficiary . . .” Pursuant to the
Restatement Second,136 any distributions received by a beneficiary are not protected by
spendthrift provisions.137 The result is that spendthrift provisions only protect assets
while held in trust. Therefore, if spendthrift provisions only protect assets that are held in
trust, does UTC §501 allow attachment by any creditor? If UTC §501 is interpreted this
way, it for the most part almost completely defeats the asset protection benefits of
using a trust since any creditor could attach and merely wait for satisfaction of his or her
The UTC does not limit the courts from adding judicially created exception
creditors. Further, the Restatement Third encourages the expansion of exception
creditors. Comment a(2) specifically provides that “[s]pecial circumstances or evolving
policy may justify recognition of other exceptions, allowing the beneficiary’s interest to
be reached by certain creditors in appropriate proceedings….[p]ossible exceptions in this
case require case-by-case weighing of the relevant considerations and evolving policies.”
In essence this part of the Restatement Third gives the courts a blank check to
create an exception at the court’s whim. So while the UTC exception list is incredibly
troublesome from an asset protection perspective, interpretation of the UTC by the
Restatement Third is much worse. Furthermore, this portion of the Restatement Third
continues, “[i]n some circumstances, to permit attachment despite the spendthrift restraint
may not undermine, and may even support, the protective purposes of the trust [emphasis
added] or some policy of law.” Since it is inconceivable that a client would ever ask the
trust scrivener to draft the trust so that creditors of the beneficiaries can recover from the
trust, it is unlikely that this could ever be a “purpose” of the trust.
Under the Restatement Second, it appeared that when attorneys sued the trust for
fees to protect a beneficial interest, the courts seldom adopted the exception. The UTC
takes the opposite position of common law by codifying this exception for attorney’s
fees. 138 The comment under Section 503 provides that “[t]his exception allows a
beneficiary a modest means to overcome an obstacle preventing the beneficiary’s
obtaining services essential to the protection or enforcement of the beneficiary’s rights
under the trust.” However, almost all discretionary trusts are created with the purpose
that the beneficiaries have virtually no right to challenge the trust. Hence, the terms
“sole,” “absolute,” “unfettered” and “uncontrolled” discretion were used to mean exactly
what they say.
Under the UTC and the Restatement Third, a reasonableness standard (or good
faith standard) is now imposed on the trustee. Does the attorney fee exception under the
UTC now mean that the trust is obligated to pay for a challenge by the beneficiary where
most likely such challenge is against the settlor’s wishes? Further, does this mean that an
exception creditor may challenge a discretionary trust when suing under the distribution
standard, and that the trust is obligated to pay for it? Unfortunately, with the first
situation this may easily be the case, and, with the second situation, neither the statutory
language of the UTC nor its Comments clearly establish whether this is in fact the case.
C. Restatement (Third) of Trusts
The Restatement Third adopts a substantially similar approach to that of the UTC
by imposing a reasonableness standard of review. In this respect, the Restatement Third
is in no sense a restatement of the current law of trusts at all. As related to the common
law of almost all states, the Restatement Third is a complete rewrite of history in this area.
At first blush, the Restatement Third appears to have narrowed the exception
creditors to three:
(a) Support of a child, spouse, or former spouse;
(b) Services or supplies provided for the necessities; or
(c) For the protection of the beneficiary’s interest in the trust.139
However, comment a(1) specifically provides that governmental claimants, and
other claimants as well, may reach the interest of a beneficiary of a spendthrift trust to the
extent provided by federal law or an applicable state statute.
Special Needs Trusts
With respect to Medicaid or special needs trusts, the UTC and Restatement Third
create two big concerns. First, will a federal or state government be able to attach the
beneficial interest? Second, will the Medicaid or special needs trust be considered an
available resource of the beneficiary?
For states that pass the UTC, it may only be a short period of time before third
party140 Medicaid or special needs type planning will be greatly curtailed and eventually
eliminated. If the discretionary trust and support trust distinction no longer exists, then
the federal government or state legislature can pierce any trust by enacting a statute
saying that the government may attach the beneficiary’s interest and reach some or all of
the trust assets.
In states that do not follow the UTC or Restatement Third, an interest in a
discretionary trust is not a property interest (i.e., and enforceable right). Both Medicaid
trust and special needs trust planning depend on the dichotomy between discretionary and
support trusts related to this property issue. In fact, the federal or state government need
not necessarily attach a beneficiary’s interest. The federal or state government may
merely consider the trust as an “available resource” and deny benefits.141
Beneficiary as Sole Trustee
Attorneys often draft trusts in which one of the beneficiaries is the sole trustee.
For estate tax purposes, such a trust, if drafted correctly with an ascertainable standard, is
not included in the trustee/beneficiary’s taxable estate.142 Unfortunately, under the
Restatement Third, Section 60, when a trustee/beneficiary is the sole trustee, any creditor,
not just an exception creditor, may reach the maximum amount that the trustee may
properly take.143 The Restatement Third departs from common law. Originally, the UTC
was silent on this issue. However, after opponents to the UTC expressed their concern
over this issue, the UTC was amended in August of 2004 so that a sole
trustee/beneficiary’s interest would not be subject to creditor attachment if such interest
was limited by an ascertainable standard.
Domestic Relations Case and Imputed Income
In Dwight v. Dwight,144 upon dad’s death, sixty percent of the estate went to his
two daughters outright, and the other forty percent of the estate went to the son in a
discretionary trust. 145 The trust was created approximately two years after this second
son was divorced. The trust was discretionary, and the distribution provisions provided
that the trustee may make distributions of income and principal as the trustee deems to be
necessary or desirable for the support, comfort, maintenance or education of the
beneficiaries. The court concluded that this was a discretionary standard. The
beneficiaries were the son and the son’s issue. During the nine years prior to the
Massachusetts Appellate Court decision, the trust made one discretionary distribution of
$7,000 to the son. During this period of time, the trust corpus grew from $435,000 to a
value of $984,000.
The trial court judge stated that it was highly likely that the principal reason the
son received his inheritance in trust rather than outright was in order to defeat a claim for
alimony. The trial court further found that the son had access to additional funds at
anytime he desired based on two facts:
(1) The broad purposes for which the trustee may make payments to the son;
(2) A statement the son made to the trustee that he did not need any additional
The trial court found that the son’s earnings should be imputed from the
discretionary trust for purposes of alimony. The Massachusetts Court of Appeals agreed
with the trial court.
Without any discussion, the Appellate Court dismissed the son’s contention that
the trust was a discretionary trust. Rather, the opinion cites the Restatement of Trusts
(Third), Section 59 (Ten. Draft No. 2, 1999) as authority for dismissing the son’s claim.
As noted above, under the Restatement Third as well as the UTC146 a spouse can reach
the assets of a discretionary trust for alimony and child support. Further, a judge may
determine what amount the trustee should “reasonably” distribute or what amount should
distributed in “good faith.”147 The broad standards for the purpose of the distributions
must be analyzed to determine whether distributions should have been made (and
therefore be part of the alimony computation). Here, the court determined that defeating
an alimony claim was not an acceptable purpose. Therefore, under both the UTC and the
Restatement Third, the court was within its authority to impute income to the husband for
the basis of alimony, even though he only received a token of what was imputed to him.
Although Dwight v. Dwight relied on the Restatement Third in reaching its
conclusion, the case was decided before the Restatement Third was even finalized.
Further, Massachusetts has not yet adopted the UTC. However, if Massachusetts had
adopted the UTC, to add insult to injury, it appears that the former spouse would also be
able to recover legal fees from the trust.
End Round to Force A Distribution For All Creditors
All creditors may attach an “overdue” or “mandatory” distribution under UTC
§506. Unfortunately, the terms “overdue” and “mandatory” are both undefined. Further
problems are created when one refers to the Third Restatement for interpretation of a
mandatory distribution under the newly created theory of a “continuum of discretionary
trusts.”148 This is because a judge must now interpret the distribution language of the
trust to determine where the trust should be classified on this new undefined continuum
of discretionary trusts.
Once this determination has been made, the judge would then determine when
and how much should be periodically distributed to the beneficiary. This is the amount
that would become an overdue distribution in the event it was not timely paid. For
example, distribution language such as “the trustee may make distributions, in the
trustee’s sole and absolute discretion, for health, education, maintenance, and support”
may create a scenario in which the judge concludes that the trustee should periodically
make distributions to the beneficiary. If this is the result, then these deemed distributions
would be subject to attachment by any creditor.
Planning Around the Restatement Third and UTC
As noted above, both the UTC and the Restatement Third seem to have gone to
great lengths to greatly reduce the asset protection provided by creating a reasonableness
or good faith standard, even if the terms of the trust provide for the opposite. Therefore,
the trust scrivener should consider providing absolutely no standard whatsoever when
drafting a discretionary trust. For example, the trust could be drafted such that “the
trustee may make distributions in his sole and absolute discretion to any beneficiary.”
While this will provide some help to mitigate the asset protection problems posed
by the Restatement Third, it may not solve the problem. This is because, under Section
50, comment d, when no standard is provided, the Restatement of Trusts Third provides
that “even then a general standard of reasonableness, or at least a good-faith judgment,
will apply to the trustee, based on the extent of the trustee’s discretion, the various
beneficial interests created, the beneficiaries’ circumstances and relationships to the
settlor, and the general purposes of the trust.” Regardless, not including a standard of
distribution will make it more difficult for a judge to conclude that the intent of the settlor
was to create an enforceable right in the beneficiary for a distribution.
While all exception creditors may generally attach a remainder interest, it appears
that a remainder interest in a dynasty interest would not be able to be attached because it
is an interest that does not vest with anyone. In this respect, drafting trusts with dynasty
interests should still avoid many creditor issues and should be a matter of course for most
clients, not just a technique for the ultra-wealthy.
From an asset protection perspective, the defects in both the UTC and
Restatement Third may be so great that clients domiciled in a UTC state should strongly
consider forum shopping and using the laws of another state for their high-net-worth
clients. From a domestic perspective, an estate planner will have two options: (1) a non-
UTC state, or (2) a domestic asset protection trust (“APT”) state. A domestic APT state
may prove to be a better choice. First, in the event a conflict of law issue arises between
a non-UTC state and a domestic APT state, many judges in non-UTC states may not be
as concerned with upholding their own state law as would a judge in a domestic APT
jurisdiction. Second, it appears much more likely that a domestic APT state would have
a strong public policy reason to see the conflict of law issue through to the U.S. Supreme
Court. For domestic asset protection trust states, estate planners should consider Alaska,
Delaware, Nevada, and Rhode Island.
Unfortunately, the conflict of law clause in both the UTC and the Restatement
Third allow a judge to use the “most significant relationship” test if the law chosen under
the trust violates a strong public policy of the forum state.149 It is questionable whether
the U.S. Supreme Court would uphold this conflict of law provision. However, a factor
test, including the factors of the residence of the trustee, the location of assets, where the
trust was originally formed, the residence of the settlor, and the residence of the
beneficiaries, may be more determinative. In this respect, the more factors in favor of the
non-UTC jurisdiction, the more likely the choice of law clause in the trust will be upheld.
Furthermore, two of the factors - the residence of the trustee, as well as the location of the
assets - may be weighed to a greater extent than the other factors. For this reason, in the
event the estate planner has decided that forum shopping is the best alternative, it may be
wise to move all liquid assets out of UTC states to non-UTC jurisdictions.
While the Uniform Trust Code has not yet been adopted by many states, nor are
the authors aware of a reported case interpreting the asset protection results decided
under the Restatement Third (with the exception of Dwight v. Dwight), both of these
promulgations would change over one hundred and twenty-five years of common law
regarding the distinction between support trusts and discretionary trusts. Unfortunately,
the changes would operate to significantly reduce the asset protection of discretionary
trusts and special needs trusts from all exception creditors, including an estranged spouse.
Furthermore, the possible expansion of exception creditors in this area of
spendthrift trusts is quite troublesome, particularly in the bankrupt context. The possible
classification of current as well as remainder interests as marital property, a factor to be
used to determine the equitable division of marital property, and the imputation of
income from the trust for the purpose of child support and alimony, also create problems.
The ability for all creditors to force a distribution based on the undefined
distribution terms “mandatory” and “overdue” adds further complications. Finally, in the
event a court determines that all creditors may attach an interest in a trust and wait for
any future distributions, then asset protection through spendthrift protection may be
substantially impaired, if not virtually eliminated. The same is also true if the bankruptcy
trustee is allowed to stand in the shoes of the debtor and force a distribution based on the
standard included in the spendthrift trust. In this respect, in order to retain the traditional
asset protection afforded by discretionary trusts and spendthrift trusts, many estate
planners may want to forum shop by moving both the trust and the underlying assets out
of a UTC state.
1 Howard D. Rosen, 810 T.M., Asset Protection Planning, BNA Tax Management
Portfolio at A-1.
2 Restatement (Second) of Trusts, Section 157.
4 As discussed later in this article, in a non-UTC state or non-hybrid trust state,
exception creditors may only recover against a trust that is classified as a support
trust, not against a trust that is classified as a discretionary trust.
5 Rather than using a property analysis, some courts will find that the beneficiary’s
interest has no ascertainable value. Miller v. Department of Mental Health, 442
N.W.2d 617 (Mich. 1989); Henderson v. Collins, 267 S.E.2d 202 (Ga. 1980); In
re Dias, 37 BR 584 (D. Idaho 1984). In essence, the analysis is the same - there is
no interest or enforceable right that a creditor may attach because under this
6 Restatement (Second) of Trusts, Section 155, comment b.
7 Miller v. Department of Mental Health, 442 N.W.2d 617 (Mich. 1989);
Restatement (Second) of Trusts, Section 157; Henderson v. Collins, 267 S.E.2d
202 (Ga. 1980); In re Dias, 37 BR 584 (D. Idaho 1984).
8 In re Bottom, 176 B.R. 950 (N.D. Fla. 1994).
9 Restatement (Second) of Trusts, Section 161.
10 Restatement (Second) of Trusts, Section 162.
11 First National Bank of Maryland v. Dept. of Health and Mental Hygiene, 399
A.2d 891 (Md. 1979); Restatement (Second) of Trusts, Section 154.
12 Chenot v. Bordeleau, 561 A.2d 891 (R.I. 1989); Eckes v. Richland County Social
Services, 621 N.W. 2d 851 (ND 2001); Restatement (Second) Trusts, Section 128,
comments d and e.
13 Lineback by Hutchens v. Stout, 339 S.E.2d 103 (NC App. 1986).
14 For estate tax purposes, under IRC §2041, the “welfare” standard would result in
the trust failing the definition of an ascertainable standard and thereby being
deemed a general power of appointment. However, for the definition of a support
trust, it is included within the ascertainable standard. Further, in some cases,
language such as “comfort and general welfare” will also take the trust language
outside that of a general support trust. Lang v. Com., Dept of Public Welfare, 528
A.2d 1335 (PA 1987); Restatement (Second) of Trusts, Section 154 and comments
thereto. But see Bohac v. Graham, 424 N.W.2d 144 (ND 1988).
15 Eckes v. Richland County Social Services, 621 N.W.2d 851 (ND 2001).
16 McElrath v. Citizens and Southern Nat. Bank, 189 S.E.2d 49 (GA. 1972).
17 In re Carlson’s Trust, 152 N.W.2d 434 (SD 1967).
18 McNiff v. Olmsted County Welfare Dept., 176 N.W. 2d 888 (Minn. 1970).
19 First National Bank of Maryland v. Dept. of Health and Mental Hygiene, 399
A.2d 891 (Md. 1979).
20 Town of Randolph v. Roberts, 195 N.E.2d 72 (Mass. 1964); Lineback, 339 S.E. 2d
at 106 (NC App. 1986); Ridgell v. Ridgell, 960 S. W. 2d 144 (Tex. App. 1997);
Restatement (Second) of Trusts, Section 187, comment e.
21 State ex. rel. Secretary of SRS v. Jackson, 822 P2d 1033 (KS 1991).
22 Myers v. Kansas Dept. of Social and Rehabilitation Services, 866 P.2d 1052 (Kan.
23 McNiff v. Olmstead County Welfare Dept., 176 N.W.2d 888 (Minn. 1970).
24 In re Matter of Leona Carlisle Trust, 498 N.W.2d 260 (Minn. App. 1993).
26 Zeoli v. Commissioner of Social Services, 425 A.2d 553 (Conn. 1979).
27 Simpson v. State Dept. of Social and Rehabilitation Services, 906 P.2d 174 (Kan.
28 Eckes v. Richland County Social Services, 621 N.W.2d 851 (ND 2001).
29 Elvelyn Ginsberg Abravanel, Discretionary Support Trusts, 68 Iowa L. Rev. 273,
279, n. 26 (1983).
30 Bohac v. Graham, 424 N.W.2d at 144 (ND 1988).
31 424 N.W. 2d at 146.
32 607 N.W.2d 237 (ND 2000).
33 528 A.2d 1335 (PA 1987).
34 517 N.W.2d 394 (Neb 1994).
35 In Strojek ex re. Mills v. Hardin County Bd. of Supervisors, 602 N.W. 2d 566
(Iowa App. 1999); In re Sullivan’s Will, 12 N.W.2d 148 (Neb. 1943); Elvelyn
Ginsberg Abravanel, Discretionary Support Trusts, 68 Iowa L. Rev. 273, 290
(1983); 3 Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts
§187 at Page 15 (4th ed. 1988).
36 In Strojek ex re. Mills v. Hardin County Bd. of Supervisors, 602 N.W. 2d 566
(Iowa App. 1999); Elvelyn Ginsberg Abravanel, Discretionary Support Trusts, 68
Iowa L. Rev. 273, 290 (1983); Lawrence A Forlik, Discretionary Trusts for a
Disabled Beneficiary: A Solution or a Trap For the Unwary?, 46 U. Pitt L. Rev.
335, 342 (1985).
37 Bureau of Support in Dep’t of Mental Hygiene & Correction v. Kreitzer, 243 N.E.
2d 83 (Ohio 1968).
38 Martin v. Martin, 374 N.E. 2d 1384 (Ohio 1978).
39 Different courts define the term “bad faith” slightly differently. As used in this
article, the term bad faith means the trustee (1) acts dishonestly, (2) acts with an
improper motive, or (3) fails to use his or her judgment. In Re Jones, 812 P.2d
1152 (Colo. 1991) (citing Scott on Trusts, Section 130 at Page 409 (4th ed. 1989).
Also see the detailed analysis of Scott on Trusts, Section 187 at Page 15 where it
is noted that if the distribution standard includes enlarged or qualifying adjectives
such as “sole and absolute discretion” combined with “no fixed standard by which
the trustee can be determined is abusing his discretion…the trustee’s discretion
would generally be deemed final.” Furthermore, Section 187.2 provides, “[e]ven
though there is no standard by which it can be judged whether the trustee is acting
reasonably or not, or though by the terms of the trust he is not required to act
reasonably, the court will interfere where he acts dishonestly or in bad faith, or
where he acts from an improper motive.” This analysis by Scott on Trusts
remains consistent through the 2003 supplemental volume.
George Taylor Bogert also seems to hold relatively the same definitional analysis
as Scott in The Law of Trusts and Trustees, 2nd Edition 1980, Supplement through
2003. Section 560 of the Supplement at Page 183 provides that if a settlor has
given a discretionary power (without qualification), the court is reluctant to
interfere with the trustee’s use of the power…Hence, in the absence of one or
more of the special circumstances mentioned hereinafter, the court will not upset
the decision of the trustee. These special circumstances (at Page 196) are (1) a
trustee fails to use his judgment; (2) an abuse of discretion; (3) bad faith; (4)
dishonesty; (5) an arbitrary action. Regarding the issue of “arbitrary action,”
Bogert provides, “[i]f the trustee has gone through the formality of using his
discretion, but has not deliberately considered the arguments pro and con, and
thus has made a decision for no reason at all, his conduct may be characterized as
arbitrary and capricious, as amounting to a failure to use his discretion. In this
respect, Bogert suggests that the “arbitrary” action is a subset of a trustee failing
Also, both Scott and Bogert note that a few states have statutes where unless the
trust agreement contains language such as the “sole and absolute discretion” of
the trustee, the trustee may not act arbitrarily. Bogert 2003 Suppl. at 199,
footnote 85; Scott, Section 187.2, Page 39, footnote 12; California Probate Code
§1608, enacted 1986 c.820; Montana Code §72-23-306 (1983); North Dakota
Cent. Code §59-02-12; South Dakota Codified Laws §55-3-9 (1967).
40 Carlisle v. Carlisle, 194 WL 592243 (Superior Ct. Connecticut 1994); Lauricella
v. Lauricella, 565 N.E. 2d 436 (Mass. 1991).
41 Miller v. Department of Mental Health, 442 N.W.2d 617 (Mich. 1989);
Henderson v. Collins, 267 S.E.2d 202 (Ga. 1980); In re Dias, 37 BR 584 (D.
42 A creditor cannot recover against a beneficial interest that is not a property
interest. Magavern v. U.S., 550 F.2d 797 (2nd Cir. 1977) (reversing the state court,
but still discussing the property interest issue). However, due to some state
domestic relations statutes, a value may be assigned to a discretionary interest in a
trust to determine what the other spouse should receive upon the divorce.
43 Graham v. Graham, 194 Colo. 429; 574 P.2d 75, 76 (Colo. 1978) (citing Black’s
Law Dictionary, 1382 [4th ed.]).
44 Senior v. Braden, 295 U.S. 422 (1935); Brown v. Fletcher, 235 U.S. 589 (1915);
II W. Fratcher Scott on Trusts, Section 130 at 406 (1987).
45 In re Question Submitted by the United States Court of Appeals for the Tenth
Circuit, 191 Colo. 406, 411; 553 P.2d 382, 386 (1976).
46 Restatement (Third) of Trusts, Section 56, comment a; Uniform Trust Code,
47 Chenot v. Bordeleau, 561 A.2d 891 (R.I. 1989); Eckes v. Richland County Social
Services, 621 N.W. 2d 851 (ND 2001); Restatement (Second) of Trusts, Section
128, comments d and e.
48 Each state law must be analyzed in this respect. However, the authors are
unaware of a case where state law held that a beneficiary of a support trust did not
have a property right (i.e., an enforceable right) to force the trust to make a
distribution pursuant to the support standard.
49 In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991); G. Bogert, Trusts and
Trustees, Section 228 (2nd ed. 1979).
51 U.S. v. O’Shaughnessy, 517 N.W. 2d 574 (Minn. 1994); In re Marriage of Jones,
812 P.2d 1152 (Colo. 1991).
52 In Strojek ex re. Mills v. Hardin County Bd. of Supervisors, 602 N.W. 2d 566
Section 187, at 15 (4th ed. 1988).
53 Balanson v. Balanson, 25 P.3d 28 (Colo. 2001); Davidson v. Davidson, 474 N.E.
2d 1137 (Mass. App. Ct. 1985); Trowbridge v. Trowbridge, 114 N.W.2d 129, 134
54 Restatement (Second) of Trusts, Section 161.
55 Henderson v. Collins, 267 S.E.2d 202 (Ga. 1980) [vested remainder interest in a
discretionary trust may be sold at judicial foreclosure sale]; Burrell v. Burrell, 537
P.2d 1 (Alaska 1975); Moyars v. Moyars, 717 N.E. 2d 976 (Ct. App. Ind. 1999);
Benston v. Benston, 656 P.2d 395 (Or. App. 1983); Lauricella v. Lauricella, 565
N.E. 2d 436 (Mass. 1991) [under all of these cases, a vested remainder interest
was considered marital property for division purposes].
56 Mid American Corp. v. Geisman, 380 P.2d 85 (Okla. 1963) [A debtor received a
remainder interest under a will. Once the death of the will maker had occurred,
the remainder interest was vested. It was not in trust, and a simple future property
analysis provided for the property to be received under the will to be sold at a
judicial foreclosure sale.].
57 In Re Neuton, 922 F.2d 1379 (9th Cir. 1990) [where the fact that the debtor would
need to outlive his mother in order to take the trust property was not so contingent
as to prevent the judicial foreclosure sale of a 25% of the debtor’s interest by a
bankruptcy trustee]; Balanson v. Balanson, 25 P.3d 28 (Colo. 2001); Davidson v.
Davidson, 474 N.E. 2d 1137 (Mass. 1985); Benston v. Benston, 656 P.2d 359 (Or.
App. 1983); Trowbridge v. Trowbridge, 114 N.W. 2d 129 (Wis. 1962) [Under all
of these cases, vested remainder interests were not too indefinite to be classified
as marital property for purposes of division.]; but see Loeb v. Loeb, 301 N.E. 2d
349 (Ind. 1973) where the contingency of outliving the debtor’s mother was
considered too indefinite for purposes of equitable division in a divorce.
58 Mid America Corp. v. Geisman, 380 P.2d 85 (Okla. 1963) [In a one paragraph
holding, the Supreme Court of Oklahoma reversed the appellate court decision to
sell the remainder interest, noting the proper remedy was a lien. The Supreme
Court thought the remedy was too drastic a measure as related to the beneficiary.].
© 2003-2004 by Mark Merric and Steven J. Oshins. All rights reserved. 47
59 Restatement (Third) of Trusts, Section 56, comment e.
60 The U.S. Supreme Court followed the common law view of spendthrift protection
in Nichols v. Eaton, 91 U.S. 716 (1875).
61 Even though almost all scriveners include a spendthrift provision in a trust, the
trust instrument must still be examined to make sure that this is indeed the case.
If a spendthrift clause is not included, a creditor stands in the shoes of the
beneficiary and may enforce any right that he has - mandatory distribution,
ascertainable standard distribution or a remainder interest. In re Katz, 203 B.R.
227 (E.D. Pa. 1996); Chandler v. Hale, 377 A.2d 318 (Conn. 1977).
62 This is particularly true should the governing state law of the trust ever adopt the
UTC or the Restatement (Third) of Trusts.
63 In Re Graham 726 F.2d 1268 (C.A.8. Iowa 1984); In re Stephens, 47 B.R. 85
(Bkrtcy. D. Vt. 1985).
64 Restatement (Second) of Trusts, Section 157.
65 In re Threewitt, 20.B.R. 434 (Bkrtcy. D. Kan. 1982); Payer v. Orgill, 191 N.E.2d
373 (Ohio 1963).
66 Department of Mental Health and Development Disabilities v. First Nat. Bank of
Chicago, 432 N.E. 2d 1086 (Ill. App. 1 Dist., 1982); Department of Mental
Health and Developmental Disabilities v. First Nat. Bank of Chicago, 432 N.E.
2d 1086 (Ill. App. Dist. 1982); State v. Rubion, 308 S.W. 2d 4 (Tex. 1957); Lang
v. Com., Dept of Public Welfare, 528 A.2d 1335 (Pa. 1987); Sisters of Mercy
Health Corp. v. First Bank of Whiting, 624 N.E. 2d 520 (Ind. App. 3 Dist. 1993).
67 Bank One Ohio Trust & Co., 80 F.3d 173 (6th Cir. 1996).
68 622 F.2d 387 (8th Cir. 1980).
69 But see U.S. v. Riggs Nat. Bank, 636 F. Supp 172 (D.D.C. 1986).
70 For example, if the beneficiary children are adults (i.e., the spouse has no support
obligation) and the distribution is pursuant to an ascertainable standard, the
spouse may be the sole trustee without IRC §2041 estate inclusion.
71 As a trustee, the spouse or child would have unlimited power to distribute any
amount of the trust assets to himself as a beneficiary of the trust.
72 Estate of Carpenter, 45 AFTR 2d 80-1784, 80-1 USTC 13,339 (D. Wis. 1980);
Independence Bk. Waukesha (N.A.) v. U.S., 761 F.2d 442 (7th Cir. 1985) –
tangential reference to “without court approval”; analogy – PLR 9118017; but see
Best v. U.S., 902 F. Supp. 1023 (D. Neb. 1995) where “sole and absolute”
language was not argued by the Service.
73 The only exceptions are Iowa, Nebraska, North Dakota, and possibly
Pennsylvania, each of which has taken the position that there is a third type of
trust – a “discretionary support trust.”
74 One would hope that various judges throughout the states would agree
whether similar conflicting language constituted a discretionary trust or
one based on an ascertainable standard. Unfortunately, this is generally
not the case. The judges appear to be equally confused on the issue.
Further, even if in one state the judges would be consistent on what similar
conflicting language meant, what if the trust jurisdiction changes to
another state or nation? Will the new jurisdiction agree with the old
jurisdiction’s interpretation of the conflicting language?
Support Trust Conflicting Language - The following court decisions noted that
the language of the trust used both discretionary and support language, but held
that the trust was a discretionary trust:
*Myers v. Kansas Depts of SRS, 866 P.2d 1052 (Kan. 1994).
*Roorda v. Roorda, 300 N.W. 294 (1941).
*Lineback by Hutchens v. Stout, 339 S.E.2d 103 (NC App. 1986).
*Chenot v. Bordeleau, 561 A.2d 891 (RI 1989).
Discretionary Trust Conflicting Language - The following court decisions noted
that the language of the trust used both discretionary and support language, but
held that the trust was a support trust:
*Bohac v. Graham, 424 NW 2d. 144 (ND 1988).
*Button by Curio v. Elmhurst Nat. Bank, 522 N.E.2d 1368 (Ill. App. 1988).
*Kryzsko v. Ramsey County Social Services.
*Bureau of Support in Dept. of Mental Hygiene and Correction v. Kreitzer, 243
N.E. 2d 83 (Ohio 1968).
*McNiff v. Olmsted County Welfare Dept., 176 N.W.2d 888 (Minn. 1970).
75 Iowa, Nebraska, North Dakota, and possibly Pennsylvania. Also, as previously
discussed, Ohio imposes a reasonableness standard as to whether the trustee must
make distributions to a beneficiary, but Ohio does not use the term “hybrid trust.”
76 In Strojek ex re. Mills v. Hardin County Bd. of Supervisors, 602 N.W. 2d 566
77 Restatement (Second) of Trusts, Section 161; Henderson v. Collins, 267 S.E.2d
202 (Ga. 1980) [noting that in this case a remainder interest was a future property
78 Martin v. Martin, 374 N.E.2d 1384 (Ohio 1978); Miller v. Department of Mental
Health, 442 N.W. 2d 617 (Mich. 1989).
79 However, in the highly controversial case U.S. v. Craft, 122 S. Ct. 1414 (2002)
the Supreme Court overturned 50 years of well-established property law when it
stated that federal common law determined property rights.
80 In Re Neuton, 922 F.2d 1379 (9th Cir. 1990).
81 Miller v. Department of Mental Health, 442 N.W. 2d 617 (Mich. 1989).
82 In re Bottom, 176 B.R. 950 (N.D. Fla. 1994).
83 In re Hersloff, 147 B.R. 262 (M.D. Fla. 1992); In re Schwen, 43 Collier Bankr.
Cas. 2d 255 (D. Minn. 1999).
84 David B. Young, The Pro Tanto Invalidity of Protective Trusts: Partial Self-
Settlement and Beneficiary Control, 78 MARG.L.REV, 807, 855 (1955).
85 In re Coumbe, 304 B.R. 378 (9th Cir. 2003).
86 In re Balanson, 25 P.3d 28 (Colo. 2001).
87 In re Marriage of Rosenblum, 602 P.2d 892 (1979).
88 Davidson v. Davidson, 474 N.E. 2d 1137 (Mass. App. Ct. 1985); Trowbridge v.
Trowbridge, 114 N.W.2d 129, 134 (Wis. 1962).
89 537 P.2d 1 (Alaska 1975).
90 25 P.3d 28 (Colo. 2001).
91 194 WL 592243 (Superior Ct. of Conn. 1994).
92 717 N.E.2d 976 (Ct. App. Ind. 1999).
93 301 N.E. 2d 349 (Ind. 1973).
94 474 N.E. 2d 1137 (Mass. 1985). See also Lauricella v. Lauricella, 565 N.E. 2d
436 (Mass. 1991) where a vested remainder interest in an irrevocable trust subject
to a term of years was subject to division as marital property.
95 692 P.2d 411 (Mont. 1984).
96 638 A.2d 1254 (N.H. 1994).
97 ND Sup Ct., No 940003 (1994).
98 374 N.E. 2d 1384 (Ohio 1978).
99 656 P.2d 395 (Or. App. 1983).
100 607 A.2d 883 (Vt. 1992).
101 114 N.W. 2d 129 (Wis. 1962).
102 Restatement (Second) of Trusts, Section 162; Henderson v. Collins, 267 S.E. 2d
202 (Ga. 1980) [noting that a remainder interest was future property].
103 Some state statutes on domestic relations issues do not separate alimony and
property settlements. Rather, these states view the two as integrated in a divorce
settlement. In these states, the spouse would be an exception creditor.
104 Loeb v. Loeb, 301 N.E. 2d 349 (Ind. 1973) [where a wife’s interest under a trust in
which she is not a beneficiary can never be greater than her beneficiary-husband’s
interest]; Buckman v. Buckman, 200 N.E. 918 (Mass. 1936) [where a former
spouse attempting to enforce alimony stood “no better than any other creditor”].
Note that Buckman appears to have been reversed by the holding in Davidson v.
Davidson, 474 N.E. 2d 1137 (Mass. 1985). However, while the Davidson court
cited Buckman, it did not specifically state that such holding was reversed.
105 Davidson v. Davidson, 474 N.E.2d 1137 (Mass. 1985).
106 Restatement (Second) of Trusts, Section 161; Henderson v. Collins, 267 S.E. 2d
107 Dwight v. Dwight, 756 N.E.2d 17 (Mass. Ct. of App. 2001).
108 Restatement (Third) of Trusts.
109 See Endnote 39.
110 Restatement (Second) of Trusts, Section 155, comment b.
111 McDonald v. Evatt, 62 N.E. 2d 164 (Ohio 1945).
112 Caswell v. Lenihan, 126 N.E.2d 902 (Ohio 1955); Huntington Natl. Bank v.
Aladdin Crippled Children’s Hosp. Assn., 157 N.E.2d 138 (Ohio App. 1959).
113 Culver v. Culver, 169 N.E.2d 486 (Ohio App. 1960).
114 It is uncertain how the Court is using the term “bad faith” in this case.
115 Bureau of Support in the Department of Mental Hygiene and Correction v.
Kreitzer, 243 N.E.2d 83 (Ohio 1968).
116 The following are unreported appellate cases that follow the Kreitzer analysis:
Matter of Gantz, 1986 WL 12960; Samson v. Bertok, 1986 WL 14819 (however,
the creditor did not recover because it was not a governmental claim); Matter of
Trust of Stum, 1987 WL 26246; Schierer v. Ostafin, 1999 WL 493940 (however,
the creditor did not recover because it was not a governmental claim).
117 No. L-96-073 (Ohio App. 6 Dist. 1997).
118 2001 WL 1123960 (Ohio App. 7 Dist).
119 Metz v. Ohio Dept. of Human Services, 762 N.E. 2d 1032 (OH App. 2001).
120 582 N.E.2d 1047 (Ohio 1989).
121 For more information about the beneficiary controlled trust concept, see Richard
A. Oshins and Steven J. Oshins, “Protecting & Preserving Wealth into the Next
Millenium,” Trusts & Estates (Sept. and Oct. 1998).
122 Restatement (Third) of Trusts, Section 50, comment c., last paragraph.
123 Restatement (Third) of Trusts, Section 60, comment a.
124 For purposes of this article and under case law, the term “bad faith” is not defined
as the antithesis of a good faith standard. Rather, bad faith means the trustee is
acting dishonestly, acting with an improper motive, or failing to use his or her
125 Restatement (Third) of Trusts, Section 50, comment d.
126 Restatement (Third) of Trusts, Section 60, comment a.
127 However, it should be noted that due to the incredibly confusing language in
Article 5 of the UTC, some estate planners claim that the discretionary analysis
may have only been abolished for the exception creditor for child support or
alimony. First, Section 503 provides that all exception creditors may pierce a
spendthrift provision. No distinction is made between a discretionary trust and a
support trust. The second paragraph of the comments under Section 503 of the
UTC references Section 59(a) of the Restatement (Third) of Trusts. The fifth
paragraph of the comments under Section 503 of the UTC references Section 59(b)
of the Restatement (Third) of Trusts. General comment (a) of the Restatement
Third specifically states that “certain categories of creditors [i.e., the exception
creditors] can reach beneficial interests in spendthrift trusts…, including
discretionary interests in those trusts.”
Second, Section 60 provides as to discretionary trusts that a spouse, former spouse,
or a spouse acting on behalf of a child may reach the trust assets for child support
or alimony. So at first blush, it appears that the UTC may be eliminating the
discretionary/support distinction for only this purpose. However, the first
paragraph of the comments under Section 60 provides that “[t]his section, similar
to the Restatement Third, eliminates the distinction between discretionary and
support trusts, unifying the rules for all trusts fitting within either of the former
categories.” If the rules have been unified (i.e., the discretionary property
analysis has been eliminated), then the argument that alimony and spousal support
is the only exception to a discretionary trust has little merit.
Third, adding more confusion to an already confusing Article 5, Section 503(c)
provides no limit to any state or federal claim to the extent the statute provides.
By the literal terms of this Section, this means that all of these types of federal
claimants may directly access the trust assets, regardless of whether it is a federal
or state claim. Therefore, this also appears to support the argument that the
discretionary/support distinction has been completely eliminated.
Fourth, again adding more confusion to Article 5, there is no definition of a
discretionary trust or a support trust provided by the UTC. Both Section 504 of
the UTC and Section 60 of the Restatement (Third) of Trusts say that they apply
to discretionary interests. But unlike the Restatement (Second) of Trusts, there is
128 Restatement (Third) of Trusts, Section 60, comment a goes to some length to
explain a continuum of discretion under a reasonableness standard. Unfortunately,
when courts are given a factor test, a balancing test, or a continuum to choose
from, it is usually nothing more than a blank check for a court to decide the case
almost any way it chooses. For an example of such, in the divorce case
apparently using a Restatement (Third) of Trusts analysis with a discretionary
trust, see Dwight v. Dwight, 756 N.E.2d 17 (Mass. Ct. of App. 2001).
129 A beneficiary could only bring an action if the trustee acted dishonestly, with an
improper motive, or failed to act.
130 Uniform Trust Code, Section 503.
131 11 U.S.C. §541.
132 Sligh v. First National Bank of Holmes County, 704 So 2d 1020 (Miss. 1997).
133 Miss. Code Ann. Section 91-9-503 (Family Trust Preservation Act 1998).
134 If there are twelve or less creditors, any one creditor with a claim greater than
$11,625 may file an involuntary bankruptcy. If there are more than twelve
creditors, then any three with claims aggregating greater than $11,625 may file an
involuntary bankruptcy. 11 U.S.C. §303(b).
135 Duncan v. Elkins, 45 A.2d 297 (NH 1946).
136 Restatement (Second) of Trusts, Section 152, comment j.
137 See also Lundgren v. Hoglund, 711 P.2d. 809 (Mont. 1985); Guidry v. Sheet Metal
Workers, Int’l Ass’n, 10 F.3d 700 (10th Cir. 1993).
138 Uniform Trust Code, Section 503.
139 Restatement (Third) of Trusts, Section 59.
140 A third party Medicaid or special needs trust is a trust where the parents or
grandparents have created the trust for the benefit of a child. It is not the selfsettled
trust under 42 U.S.C. §1396p(d)(4)(A) (many times commonly referred to
as a "d4A Trust").
141 Metz v. Ohio Dept. of Human Services, 762 N.E. 2d 1032 (Ohio App. 2001).
142 IRC §2041.
143 Restatement (Third) of Trusts, Section 60, comment g.
144 756 N.E. 2d 17 (Mass. Ct. of App. 2001).
145 For an excellent analysis of Dwight v Dwight, see Another Look at “Dwight” and
Spendthrift Trusts, Alexander A. Bove Jr. and Melissa Langa, Massachusetts
Lawyers Weekly, December 10, 2001.
146 Uniform Trust Code, Section 504.
147 Restatement (Third) of Trusts, Section 50, comment b.; Uniform Trust Code
148 Restatement of Trusts (Third), Section 60 comment e and e(1).
149 Uniform Trust Code, Section 107.