Trust Spendthrift Provision Can be Negated by Other Trust Provisions

The Bankruptcy Court of the Western District of Michigan recently held that a spendthrift provision in a trust was negated by other trust provisions, and resulted in a debtor’s beneficial interest in the trust becoming property of the estate.1
The issue before the Court was whether the trust restrictions prevented the debtor’s beneficial interest from being included in property of the estate.2 In this case, the debtor’s mother created a trust in 2001, and the debtor was one of four named beneficiaries of the trust. Upon the settlor’s death in August, 2011, the trust became irrevocable. The trust included a spendthrift provision that prevented any beneficiary from assigning his interest in trust income or principal. The trust also included a provision authorizing the trustees, in their discretion, to distribute trust principal to a beneficiary in the event the beneficiary could not support himself. The trust further contained an “age-based restriction” on a beneficiary’s withdrawal rights (including the debtor’s rights). The “age-based restriction” specifically provided that after a beneficiary reaches age 25, the beneficiary has a “continuing right to withdraw any amount up to one half of the value of the trust assets; and after the beneficiary attains age 30, the beneficiary has a continuing right to withdraw all trust assets.” When the settlor of the trust died, the debtor was 42-years-old.  Read More ›
Tags: Western District of Michigan