ASSERTING CLAIMS OF SUPPORT AGAINST INTER VIVOS AND TESTAMENTARY TRUSTS
© 1994 National Legal Research Group, Inc.
Difficult legal questions arise when a spouse involved in a divorce case is also the beneficiary of a testamentary or inter vivos trust. We will consider the extent to which an interest in a trust can be considered in deciding a claim for spousal or child support.
The rules of law governing treatment of trusts for support purposes are substantially different from the rules which apply in the property division context. See generally Annotation, Trust Income or Assets as Subject to Claim Against Beneficiary for Alimony, Maintenance, or Child Support, 91 A.L.R.2d 262 (1963 & Later Case Service). As in equitable distribution claims, the principles applicable to the claims for support and alimony depend on the phraseology of the state statute, the type of trust involved, and the specific interest against which a claim is brought. Unlike equitable distribution claims, alimony and support claims do not require a determination of whether the trust income constitutes "property" under the applicable distribution scheme or whether there is a marital or separate interest in the appreciation. See generally In re Marriage of Muelhaupt, 439 N.W.2d 656 (Iowa 1989) (where trust income could not be considered marital property, it was properly considered as part of husband's income for purposes of determining alimony). The resolution of support claims rests far more on the public policy of the state, as evidenced by case law and statutes, and the particular wording of the trust document under consideration.
II. TRUST DOCUMENT
Before applying any of the general rules for treatment of trusts in support cases, it is first necessary to determine the type of trust document against which a claim for support is to be raised. The classification of the trust plays a crucial role in determining the rights of claimants to rely on the trust in seeking an award of support.
The two primary types of trusts under consideration in this article are discretionary and spendthrift trusts. A discretionary trust grants the trustee the unbridled discretion to determine what distributions are to be made to the beneficiary. G.G. Bogert & G.T. Bogert, The Law of Trusts & Trustees 228 (2d rev. ed 1979); Lineback v. Stout, 79 N.C. App. 292, 339 S.E.2d 103 (1986). Counsel are cautioned to remember that frequently trust documents are drafted in such a manner that the trustee is not given absolute discretion in regard to the disbursements to be made to beneficiaries. Unless the trustee is given absolute discretion, the trust is not considered a true discretionary trust for purposes of support claims. Howard v. Spragins, 350 So. 2d 318 (Ala. 1977).
By far, spendthrift trusts generate the most litigation involving claims of support and maintenance. Under this type of document, the settlor has included a specific clause that provides that the income and corpus of the trust are not to be subject to the claims of the beneficiary's creditors. Counsel are urged to check the specific statutory authority in your jurisdiction for any limitations or exceptions concerning the validity of spendthrift trusts. See, e.g., N.C. Gen. Stat. 36A-115 (1991) (spendthrift provisions invalid unless trust falls under certain specified exceptions); Va. Code Ann. 55-19 (Cum. Supp. 1993) (spendthrift provision only valid if trust is to provide for the support and maintenance of beneficiary); G. Dienstag, The Spendthrift Trust: A Fortress Against Claims for Child Support and Maintenance, 73 Ill. B.J. 648 (1985); G.G. Bogert & G. T. Bogert, The Law of Trust and Trustees 222 n.59 (2d rev. ed. 1979).
Another type of trust frequently addressed within the context of support claims is a support trust, in which the trustee is instructed to pay only so much as is needed for the support of the named beneficiary. G.G. Bogert & G.T. Bogert, The Law of Trusts and Trustees 229 (2d rev. ed. 1979). This type of trust is generally considered not to be subject to the claims of the beneficiary's creditors. However, since a support trust is more frequently commingled with a spendthrift provision or a grant of discretionary authority, it will not be separately considered.
III. SPENDTHRIFT TRUSTS
As noted above, spendthrift trusts are generally considered to be beyond the claims of the beneficiary's creditors. In regard to claims for support, the courts have recognized two exceptions to the general rule. First, several courts have held that claims of a spouse or child are not debts, but rather legal obligations imposed as a matter of law. In other words, a beneficiary's "living expenses" are construed so as to include the expense of providing support for his spouse and children. Hardy v. Hardy, 101 Cal. App. 2d 317, 5 Cal. Rptr. 110 (1960) (where husband was bound to provide support to spouse and children, wife could subject support trust containing spendthrift clause to the payment of her alimony claim); Garretson v. Garretson, 306 A.2d 737 (Del. 1973); Marsh v. Scott, 2 N.J. Super. 240, 63 A.2d 275 (Ch. Div. 1949); Cross v. Cross, 22 A.D.2d 1013, 254 N.Y.S.2d 804 (1964); Lucas v. Lucas, 365 S.W.2d 372 (Tex. Civ. App. 1963).
The second and more accepted exception to the limitations placed on spendthrift trusts is based on public policy grounds. Under this exception, the court balances the interests in the enforcement of support orders against the clear intent of the settlor as expressed in the spendthrift clause. The courts have held that the interest in enforcing support orders outweighs the interest of the settlor in protecting the trust corpus or income from creditors' claims.
For instance, in Zouck v. Zouck, 204 Md. 285, 104 A.2d 573 (1954), the husband in a divorce action was the beneficiary of a testamentary spendthrift trust. The wife sought the specific performance of a separation agreement by authorizing the invasion of the trust. Although the court cited the general rule that creditors of the beneficiary cannot normally reach the assets of a spendthrift trust, certain exceptions to the rule had been recognized on public policy grounds. The court permitted the invasion of the trust assets by finding that the father's contractual obligation to support his wife and minor child constituted an obligation which justified, for public policy reasons, the invasion of a spendthrift trust.
Similar public policy exceptions to the general rule prohibiting invasion of spendthrift trusts have been cited by numerous jurisdictions. See Council v. Owens, 28 Ark. App. 49, 770 S.W.2d 193 (1989); Wife v. Husband, 286 A.2d 256 (Del. 1971); Bacardi v. White, 463 So. 2d 218 (Fla. 1985); Gilbert v. Gilbert, 447 So. 2d 299 (Fla. 2d Dist. Ct. App. 1984), aff'd sub nom., Southeast Bank v. Gilbert, 463 So. 2d 223 (Fla. 1985); In re Matt, 105 Ill. 2d 300, 473 N.E.2d 1310 (1985) (legislature permitted garnishment from all sources including income from spendthrift trust for purposes of recovering delinquent child support obligations); Hurley v. Hurley, 107 Mich. App. 249, 309 N.W.2d 225 (1981); In re Chusid's Estate, 60 Misc. 2d 462, 301 N.Y.S.2d 766 (Sur. Ct. 1969); Swink v. Swink, 6 N.C. App. 161, 169 S.E.2d 539 (1969); Payer v. Orgill, 91 Ohio L. Abs. 106, 191 N.E.2d 373 (C.P. 1963); Restatement (Second) of Trusts 157(a) (1959).
The exceptions to claims against spendthrift trusts are not uniformly applied by the courts. Several jurisdictions have retained a more narrow approach to claims for support and have permitted the intent of the settlor to prevail over claims by the beneficiary's spouse or children for support. The minority approach examines not only the intent of the settlor in protecting the trust property from the claims of creditors, generally, but also the intent of the settlor to have the dependent spouse or child benefit from the trust. For instance, the court in Roorda v. Roorda, 230 Iowa 1103, 300 N.W. 294 (1941), noted that the courts across the country were in conflict on the issue of whether or not spendthrift trusts were subject to the claims for support or alimony. The Iowa court stated that since the trust document in question did not evidence an intent by the testator to provide support to the dependent spouse and child, no reason existed for ignoring the express intent of the testator to dispose of her property as she saw fit. 300 N.W. at 296. The court concluded that the public policy favoring the payment of support to spouses and minor children should not destroy the spendthrift trust. See also In re Marriage of Meredith, 394 N.W.2d 336 (Iowa 1986) (recognizing that the general rule in Iowa still precludes making spendthrift trusts subject to claims for support or alimony by beneficiary's children or spouse); In re Matter of Campbell's Trust, 258 N.W.2d 856 (Minn. 1977) (intent of settlor in creating spendthrift trust controls where claims for support are made by nonbeneficiary of trust); Erickson v. Erickson, 197 Minn. 71, 266 N.W. 161 (1936) (intent of donor, rather than characterization of beneficiary's obligation, controls disposition of trust property); Martin v. Martin, 54 Ohio St. 2d 101, 374 N.E.2d 1384 (1978) (unambiguous intent of settlor not to benefit beneficiary's former spouse precluded claim by spouse to enforce alimony obligation).
Where the settlor intended the minor children or dependent spouse of the beneficiary to benefit from the trust, courts have permitted claims for support to be enforced despite the presence of a spendthrift provision. This was the result reached by the court in Howard v. Spragins, 350 So. 2d 318 (Ala. 1977). There, the obligor husband was the beneficiary under two separate trusts, both containing spendthrift provisions. The testamentary trust included provisions for the eventual distribution of the corpus and accumulated income to the settlor's grandchildren, the children of the obligor-husband. The inter vivos trust did not contain any specific references to the minor children. Both trusts contained spendthrift clauses attempting to protect the trust property from the claims of the beneficiary's creditors.
These decisions represent the clear minority approach to the treatment of spendthrift trusts in actions to enforce support or alimony obligations. Further, it should be stressed that the ability of a dependent spouse or child to recover against the assets of a spendthrift trust is based on the fact that the dependent claimant is an intended beneficiary. Clarke v. Clarke, 246 Ala. 170, 19 So. 2d 526 (1944). The dilemma then facing a claimant is that if they are not expressly provided for under the terms of the trust agreement and no applicable statute changes the rights of certain creditors to assert claims against spendthrift trusts, no recovery may be permitted. See Note, Garnishment of Spendthrift Trusts for the Enforcement of Court-Ordered Alimony or Child Support: A Public Policy Decision, 13 Fla. St. U.L. Rev. 433, 438 (1985).
Spendthrift Trust Established by Beneficiary
Often in the case of an impending divorce, one parent or spouse may attempt to insulate assets by conveying them to a spendthrift trust. Either by statute or case law, however, the general rule is that a trust established by the named beneficiary remains subject to the claims for support and alimony.
For instance, in Wolfe v. Wolfe, 21 Mass. App. Ct. 254, 486 N.E.2d 747 (1985), the husband established a revocable trust during his lifetime, naming himself as beneficiary. The husband was to receive all the income from the trust. The trustee was given absolute discretion as to the amount of corpus to be paid to the beneficiary. However, the trust was later amended to guarantee the settlor, the husband, the right to withdraw a percentage of the corpus. The trust also contained a spendthrift clause protecting the trust property from the claims of the beneficiaries' creditors. After a divorce judgment ordered the husband to pay his former spouse lump-sum alimony, the husband appealed the order on the ground that he did not have the assets necessary to satisfy the order. He maintained that he was not at liberty to use the trust property to satisfy a support debt. The court disagreed and permitted the wife to recover that portion of the trust property her former husband could withdraw from the trust. See also McLean v. McLean, 273 S.C. 571, 257 S.E.2d 751 (1979) (trust established by father out of his property that contained spendthrift clause could be considered by court in establishing child support payments).
IV. DISCRETIONARY TRUST
A determination that a trust falls within the definition of a discretionary trust frequently raises substantial obstacles to claims for support and alimony. The problems facing a dependent spouse or child when seeking to recover support from a discretionary trust are evidenced in Collins v. Collins, 239 S.C. 170, 122 S.E.2d 1 (1961). There, the husband in a divorce action was the beneficiary of an inter vivos trust established by his father. Part of the relief being sought by the wife was an order that, if the husband should default in his support obligations, the trustees be ordered to satisfy the obligations out of the trust assets. Under the terms of the trust, the trustee was given sole discretion to pay to the beneficiary
or apply for his benefit or to pay over and deliver to him discharged of all trust the whole or any part of either the income or principal of the trust estate to the extent that she shall determine that he has habits of sobriety, thrift and economy and the trustee is satisfied as to his ability to manage and control such property at the time of the payment or distribution.122 S.E.2d at 8. The husband was to receive one-half of the trust income when he reached the age of 28. At the time of the divorce and support claims, the husband was only 22.
The court there took note of the fact that at the time of the claim, the husband did not have the legal right to compel the trustee to distribute any part of the trust property to him. His creditors, including his dependent spouse and child, were in no better position than the beneficiary and could not reach the trust property. Collins v. Collins, 239 S.C. 170, 122 S.E.2d 1, 8 (1961).
Under the approach adopted by a majority of the jurisdictions, neither the income nor principal of a discretionary trust may be subject to a claim by a spouse or child for support, in the absence of a statute to the contrary. The theory is that the beneficiary's equitable interest in the trust property is subject to the exercise of the trustee's absolute discretion. As one court stated,
[i]n a discretionary trust it is the nature of the beneficiary's interest rather than a provision forbidding alienation which prevents transfer of the beneficiary's interest.In re Watts, 160 Kan. 377, 162 P.2d 82, 87 (1945). Since the beneficiary has no power or authority to force the trustee to transfer any of the trust income or principal, creditors including dependent spouses are equally powerless to reach the trust property. Smith v. Francis, 221 Ga. 260, 144 S.E.2d 439 (1965); In re Estate of Ferguson, 186 Mich. App. 409, 465 N.W.2d 357 (1990); Athorne v. Athorne, 100 N.H. 413, 128 A.2d 910 (1957); Bacardi v. White, 463 So. 2d 218 (Fla. 1985) (recognizing that if the trust in question were a true discretionary trust, trustee could not be ordered to make disbursement to beneficiary's former spouse in satisfaction of alimony obligations).
The usual solution reached by courts faced with a support claim being asserted against a discretionary trust is to issue an order stating that once the trustee exercises its discretion and makes trust income or principal available to the beneficiary, the property is to be paid directly to the person entitled to receive support from the beneficiary. First National Bank of Enid v. Clark, 402 P.2d 248 (Okla. 1965). However, unless the state has enacted a statute altering the common law rules pertaining to discretionary trusts, the courts are without authority to force trustees to exercise their discretion and make trust property available to the beneficiaries.
The frustration often felt by the dependent spouse or child when attempting to enforce support orders against a valid and enforceable trust document is evidenced by the recent decision from the Wisconsin Court of Appeals in Grohmann v. Grohmann, 20 Fam. L. Rep. (BNA) 1087 (Wis. Ct. App. Dec. 7, 1993). There, Mr. Grohmann established an irrevocable trust prior to his marriage naming himself as the primary beneficiary. The trustee was given absolute discretion to distribute both trust income and principal to Mr. Grohmann. As the settlor, Mr. Grohmann had the right to withdraw one-half of the assets at age 40 and the remainder at age 45. In a subsequent divorce action, the trial court applied Wis. Stat. Ann. 701.06(4)(b)(West 1981) and ordered that if and when any disbursements are made, 17% of the income distributed to the beneficiary shall be paid to the former spouse in satisfaction of the child support obligations. The Wisconsin statute gave trial courts the authority to order the payment of child support obligations out of future payments from discretionary trusts. The trial court noted that it had no power to control if and when any distributions were to be made. Mrs. Grohmann appealed the order and argued that the court had the authority not only to order that part of the distributions be paid in satisfaction of the child support obligations, but also to order that distributions be made by the trustee.
On appeal the court rejected Mrs. Grohmann's argument and held that while the court had authority under the statute to order the trustee to pay any future disbursements in satisfaction of the child support obligations, the court was without authority to force the trustee under a discretionary trust to exercise his authority and actually make a disbursement. The court did hold that any undistributed trust income may be included in Mr. Grohmann's income for purposes of applying the child support guidelines.
The outcome in Grohmann is representative of the effect many statutes have on claims for support that are asserted against discretionary trusts. See, e.g., Kolpack v. Torres, 829 S.W.2d 913 (Tex. Ct. App. 1992) (Texas statute gave court authority to order disbursement of income from a discretionary trust's assets for the benefit of minor child, but only after beneficiary is obligated to make payments of support). While some relief is afforded a dependent claimant under the statute, the intent of the settlor to protect the trust property continues to receive paramount consideration. Similar statutes represent an attempt by the state legislatures to overcome the harsh application of the common law of trusts to claims for support. In the absence of controlling legislation, a dependent spouse or child may be left without any recourse in collecting their support obligations from a true discretionary trust.
It thus becomes critical for a dependent spouse or child to properly classify the trust document in issue. While the application of traditional trust law may assist claimants seeking to recover a portion of the trust income or corpus, the ability to insulate the beneficiary from support claims has been recognized by some courts. Although the public policy interests in enforcing valid child and spousal support awards are given effect by many state statutes, problems in collecting support obligations clearly remain.
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