The whole point of a spendthrift trust is to protect the trust’s assets from the beneficiary’s creditors. The name hints at the purpose: the point is to protect someone who can’t control spending. Even if the necessary protection is from himself or herself.
Generally, a spendthrift trust can work very well for its intended purpose. There are, however, some circumstances when the trust can not protect the beneficiary.
Brian’s personal injury and divorce
Brian McInerney was injured in a motor vehicle accident in 2001. His two-year-old daughter died in the accident. Brian himself suffered a traumatic brain injury.
A few years after his injury, a court decided Brian was unable to handle his own decisions. The court appointed his sister to be his guardian. His wife, Susan, separated from him; she filed for divorce shortly thereafter.
Susan had inherited substantial assets from her grandfather. She agreed to put a portion of her assets into a trust for Brian’s benefit.
The spendthrift trust
As part of the couple’s separation and divorce, Susan created the trust for Brian. She transferred about $4 million of stocks and bonds, plus the couple’s home, into the trust. Brian added his own separate assets, of about $120,000. Like any spendthrift trust, it included a provision prohibiting Brian’s creditors from demanding any portion of the trust.
Brian’s sister and a bank were trustees of the trust. It named Brian as the beneficiary for his life, and identified his two surviving children as beneficiaries upon his death.
The second accident
In 2014, Brian was in another accident. This time he was killed. The crash injured the other driver and her son, who was a passenger. They sued Brian — and the trust — for their injuries.
According to the lawsuit, Brian was driving at 76 miles per hour where the speed limit was 35. He crossed the center line to pass a vehicle, and hit an oncoming car. The lawsuit claimed that the trust’s assets were reachable despite the spendthrift provision.
How could the other driver reach Brian’s trust assets? It wouldn’t be because his behavior was particularly egregious ,but because of an important limit on spendthrift trusts. Generally speaking, an individual can not put his or her own assets into a trust and successfully add a spendthrift provision.
The limitation on spendthrift trusts makes sense. If Brian was putting his own money into a trust, he ought not be able to prevent lawsuits against those assets. But if someone else put the money into the trust, the general rule is that they can include whatever limitations they wish on use of the funds.
Was Brian’s trust “self-settled”?
The key, then, was whether Brian or his ex-wife “settled” the trust. She signed it; he didn’t. Almost all the money put into the trust came from her; very little of it was Brian’s money. The trustee argued that the trust was not Brian’s creation, and the spendthrift provision should be effective.
The trial judge agreed, and dismissed the lawsuit against the trust. The injured parties appealed, and argued that Brian was really the settlor of the trust, and that his ex-wife was just acting on his behalf.
The Massachusetts Appeals Court agreed with the plaintiffs. Although Brian’s wife was the signer, and most of the money came from her, he had a right to receive the money in the divorce. When she acted to create the trust, she was acting on his behalf. “A trust is established by the person who provides the consideration for the trust even though in form it is created by someone else,” noted the appellate judges (quoting themselves from an earlier, unrelated case).
The money Susan placed in trust helped satisfy her debt to Brian. Consequently, he was the real settlor of the trust. The appellate court noted that the result was the same as in other cases involving self-settled trusts and public benefits applications. Susan, acting on Brian’s behalf, could not shield his assets from either type of treatment. Calhoun v. Rawlins, June 27, 2018.
Would the rule be the same in Arizona?
Probably, but not necessarily. Arizona agrees with the general proposition that someone can not shield their own assets by use of a spendthrift trust. One important exception: an irrevocable special needs trust may include an effective spendthrift provision..
Was Brian’s trust a special needs trust? It’s not clear from the reported decision, and it probably would not make a difference under Massachusetts law. If the couple had lived — and divorced — in Arizona, that question would have been critical. It would likely have governed how the trust was established in the first place.
Of course, there are lots of other questions unanswered in the court’s opinion. How did an incapacitated man, with a guardian and a substantial trust, come to be speeding down the road at 40 miles over the speed limit? What other decisions were his guardian and trustee making about his lifestyle and care? And what of his two children, who have become unintended victims of the entire set of circumstances? One of the limitations of reported court cases is that we often do not have those kinds of details.