The Rights of Creditors of Beneficiaries under the Uniform Trust Code: An Examination of the Compromise

The new Uniform Trust Code (the “UTC”), which recently has been introduced in the District of Columbia and six states but has not yet been enacted in any jurisdiction, is described in its prefatory note as “the first comprehensive national codification of the law of trusts.” According to its Reporter:

Crafting the provisions of Article 5 on spendthrift protection and the rights of a beneficiary’s creditors to reach the trust proved to be the most difficult task in drafting the Act. The area is controversial and conflicting policy directions yield different results. The result was a compromise, responding at least in part to the concerns of the different factions.

The ability of a creditor to reach a debtor’s interest in a trust may be affected by one or more of the following factors: (i) whether the instrument includes a spendthrift provision, (ii) whether the beneficiary’s interests in the income and principal of the trust are mandatory or discretionary, (iii) whether the beneficiary is a settlor or trustee of the trust, (iv) the identity of the creditor and the nature of the creditor’s claim, (v) the needs and circumstances of the beneficiary, the beneficiary’s dependents, and the creditor, and (vi) the size of the trust. At issue are the claims of such creditors as providers of public assistance to the needy, other providers of necessities, alimony and child support claimants, and tort claimants, as well as the claims of “ordinary” personal or commercial creditors. Closely related to the question of whether a public support provider may reach a trust beneficiary’s interest to reimburse it for the costs of care supplied to the beneficiary, is whether the interest of a beneficiary in a trust will disqualify the beneficiary from receiving public assistance.

This Article examines the protections the UTC affords beneficiaries of trusts from the claims of their creditors, the limitations on those protections, and the policies supporting the protections and their limitations. Emphasis is given to the treatment of the claims of child support and alimony claimants; the claims of public assistance providers; the claims of persons injured by a trust beneficiary’s tortious conduct; and the UTC’s rejection of the recent “trend” allowing settlors who are beneficiaries of the trusts they create to protect the trust assets from the claims of their creditors.

Two recommendations are made for states considering adoption of the UTC. First, a significant concession to creditors’ rights made by the UTC is to allow child support and alimony claimants to compel distributions from a discretionary trust that they can reach. To do so, however, such a creditor must be able to show that in not making the distribution, the trustee has abused its discretion or failed to comply with a standard of distribution. This Article argues that no such showing should be required. Rather, subject to the court’s ability to consider the needs of the beneficiary as well as the needs of the child support and alimony claimants in determining what would be an equitable award under the circumstances, such a creditor should be able to compel a distribution of the maximum amount the trustee could distribute to the debtor/beneficiary in the proper exercise of its discretion.

Second, spendthrift provisions generally prohibit creditors of trust beneficiaries from reaching their interests without regard to the size of the trust or the needs and circumstances of the beneficiary and the creditor. Under the UTC, the only creditors whose claims are not barred by such a provision are child support and alimony claimants, the state or federal government, and creditors who provided services for the protection of the beneficiary’s interest in the trust. Absent from the list are tort claimants. Unlike the Restatement of Trusts, the UTC allows a spendthrift provision to bar the claims of tort claimants without regard to the nature of the tortfeasor/beneficiary’s conduct. In the context of two recent cases raising this issue, this Article argues that at least when the beneficiary’s conduct is grossly negligent, reckless, or intentional, a spendthrift provision should not protect the beneficiary’s interest from tort claimants.