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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
August 28, 2002
No. 01-16211 THOMAS K. KAHN
________________________ CLERK
D. C. Docket No. 01-14026-CV-DLG
In Re:
JANE MCLEAN BROWN,
Debtor.
DEBORAH MENOTTE,
Plaintiff-Appellant,
versus
JANE MCLEAN BROWN,
Defendant-Appellee.
________________________
Appeal from the United States District Court
for the Southern District of Florida
_________________________
(August 28, 2002)
Before EDMONDSON, Chief Judge, BLACK and COX, Circuit Judges.
BLACK, Circuit Judge:
This case involves a Chapter 7 bankruptcy debtor seeking to exclude her
interest in a trust from the bankruptcy estate. The trust, which was created by the
debtor prior to insolvency, was established to provide income to the debtor for her
lifetime with the remainder ultimately being given to several charities. Based on
the presence of a spendthrift clause prohibiting assignment or alienation, the debtor
contends her interest in the trust is exempt from her bankruptcy estate.
Alternatively, the debtor contends her interest is exempt because the trust qualifies
as a support trust. Having created the trust for her own benefit, however, the
debtor cannot shield her interest in the trust from her creditors. This interest,
consisting of a yearly income stream from the trust assets, is not exempt from the
debtorâs bankruptcy estate. The corpus of the trust, however, is not likewise
subject to the claims of the debtorâs creditors.
I. BACKGROUND
A. Establishment of the Trust
Appellee Jane McLean Brown (Appellee), the debtor in the bankruptcy case
giving rise to this appeal, suffers from chronic alcoholism. In 1993, her mother
died, leaving her an inheritance of approximately $250,000. In order to protect the
inheritance from her own improvidence, Appellee decided to place the money into
an irrevocable trust which would pay her a monthly income for life. On
2
August 11, 1993, Appellee executed the trust agreement, entitled Irrevocable
Charitable Remainder Unitrust Agreement (ICRUA).
Under the ICRUA, Appellee is entitled to receive an annual amount equal to
7% of the net worth of the trust, valued as of the first day of each taxable year.
The payments are due in monthly installments. Appellee, who is unemployed,
lives off of the monthly payments flowing from the ICRUA. Appellee is the only
beneficiary currently entitled to receive income payments under the trust.
As a trust beneficiary, Appelleeâs only rights are to receive the 7% income
payments. Although Appellee also serves as trustee, her powers are generally
limited to directing investment decisions. She does not have the discretion to
invade the trust corpus or to alter the amount of payments made to the trust
beneficiaries. Furthermore, Appellee is prohibited from assigning or otherwise
alienating her interest in the trust by virtue of a âspendthriftâ clause contained into
the ICRUA:
To the extent permitted by law, no beneficiary shall have any
power to dispose of or to charge by way of anticipation any interest
given to her, and all sums payable to any beneficiary shall be free and
clear of her debts, contracts, dispositions and anticipations, and shall
not be taken or reached by any legal or equitable process in
satisfaction thereof.
See Article IV of the ICRUA.
3
Upon Appelleeâs death, the 7% yearly trust income payments will be made
to her daughter for life.1 At the daughterâs death, the corpus of the trust will pass
to four charities listed in the ICRUA. Although the ICRUA expressly reserves
Appelleeâs right to designate substitute or additional charitable beneficiaries by
testamentary instruction, the right of redesignation is limited to substituting or
adding other charities meeting certain Internal Revenue Code qualifications.2
B. Chapter 7 Bankruptcy
On February 4, 1999, Appellee filed a voluntary petition for Chapter 7
bankruptcy. Appellant Deborah Menotte (Appellant) was appointed as the Chapter
7 trustee. In her bankruptcy petition, Appellee listed secured and unsecured claims
totaling $110,023.53. Although Appellee acknowledged her interest in the
ICRUA, no value for the interest was included as part of her asset calculation.3
Rather, Appellee claimed her interest in the trust was exempt from the bankruptcy
1
The income payments to Appelleeâs daughter will be due under the ICRUA
as long as the daughter survives Appellee, unless Appellee revokes and terminates
the interest of the daughter through testamentary instruction. If the daughterâs
interest is revoked and terminated, the ICRUA will treat the daughter as having
predeceased Appellee.
2
The ICRUA states any charity serving as a beneficiary under the trust must
qualify as an organization described in 26 U.S.C. §§ 170(b)(1)(A), 170(c), 2055(a),
2522(a) (1994).
3
Appelleeâs interest in the ICRUA was assigned a value of â0.00.â
4
estate. Appellant objected, arguing self-funded trusts are not insulated from the
claims of creditors.
On July 26, 2000, the bankruptcy court overruled Appellantâs objection to
the claimed exemption. Based on the presence of the spendthrift clause, the
bankruptcy court concluded Appelleeâs interest in the trust could not be attached
by her creditors. As an additional ground for exemption, the bankruptcy court
indicated the trust also qualified as a support trust, which is a type of trust
established to provide for a beneficiaryâs needs. The bankruptcy court rejected
Appelleeâs alternative argument that her interest in the trust constituted an exempt
annuity.
On November 8, 2001, Appellant filed an appeal to the United States District
Court for the Southern District of Florida. On appeal, Appellant argued the
bankruptcy court erred in finding the ICRUA was exempt from the bankruptcy
estate as either a spendthrift trust or a support trust. The district court affirmed in
part, finding the ICRUA was exempt from the bankruptcy estate based on its
spendthrift provision. Although it did not need to reach the bankruptcy courtâs
other ground for exemption, the district court indicated the trust likely would not
qualify as a support trust because the ICRUA provided for payment of a fixed sum
to Appellee each year regardless of the amount needed for her support. Having not
5
been raised on appeal, the issue of whether the trust qualified as an exempt annuity
was not addressed by the district court.4 This appeal followed.
II. STANDARD OF REVIEW
In bankruptcy appeals, legal determinations of the bankruptcy court and the
district court are subject to de novo review. Bush v. JLJ, Inc. (In re JLJ, Inc.), 988
F.2d 1112, 1116 (11th Cir. 1993).
III. DISCUSSION
An estate in bankruptcy consists of all interests in property possessed by the
debtor at the time of her bankruptcy filing. 11 U.S.C. § 541(a)(1) (1994). Where
there is a restriction on transfer of the debtorâs interests under applicable non-
bankruptcy law, however, such restriction remains effective even in bankruptcy.
11 U.S.C. § 541(c)(2). As a result, spendthrift and support trusts are excluded
from a debtorâs bankruptcy estate to the extent they are protected from creditors
4
On appeal to this Court, Appellee argues the ICRUA is exempt from her
bankruptcy estate as an annuity. This issue, however, was not raised before the
district court; nor was it raised by Appellant as an issue on appeal to this Court.
Whether the ICRUA qualifies as an exempt annuity, therefore, is not properly
before the Court. See generally Depree v. Thomas, 946 F.2d 784, 793 (11th Cir.
1991) (âWe have long held that an issue not raised in the district court and raised
for the first time in an appeal will not be considered by this court.â).
6
under applicable state law.5 The state law applicable in this case is the law of the
State of Florida. We will examine in turn whether the ICRUA qualifies as either a
spendthrift trust or a support trust under Florida law.
A. The ICRUA as a Spendthrift Trust
In Florida, trusts containing valid spendthrift provisions are protected from
the reach of creditors, so long as the beneficiaries cannot exercise dominion over
the trust assets. See generally Waterbury v. Munn, 32 So. 2d 603, 605 (Fla. 1947)
(en banc) (recognizing the validity of spendthrift trusts); Croom v. Ocala Plumbing
& Elec. Co., 57 So. 243, 244-45 (Fla. 1911) (holding creditors could reach trust
property, despite presence of spendthrift clause, where the beneficiaries possessed
absolute control over the property). Where a trust is self-funded by a beneficiary,
however, there is an issue as to whether the trustâs spendthrift provision is valid as
against creditors of the settlor-beneficiary. We conclude it is not, and the
beneficiaryâs interest is subject to alienation by her creditors.
5
See Lichstrahl v. Bankers Trust (In re Lichstrahl), 750 F.2d 1488, 1490
(11th Cir. 1985) (stating the term âapplicable nonbankruptcy lawâ in 11 U.S.C. §
541(c)(2) refers to state spendthrift trust law), abrogated on other grounds by
Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242 (1992); see also Rep. of the
Commân on the Bankr. Laws of the U.S., H.R. Doc. No. 93-137, at 193 (1973)
(discussing recommendations to change the bankruptcy laws to include spendthrift
trusts within a debtorâs bankruptcy estate).
7
1. Validity of the ICRUAâs Spendthrift Provision as Against
Appelleeâs Creditors
Spendthrift trusts are defined under Florida law as âthose trusts that are
created with a view of providing a fund for the maintenance of another, and at the
same time securing it against his own improvidence or incapacity for self-
protection.â Croom, 57 So. at 244 (emphasis added); see also Waterbury, 32
So. 2d at 605 (âA spendthrift trust is one that is created with the view of providing
a fund for the maintenance of another, and at the same time securing it against his
own improvidence or incapacity for self protection.â).
As impliedly recognized by the definition of spendthrift trusts set forth in
Croom, Florida law will not protect assets contained within a spendthrift trust to
the extent the settlor creates the trust for her own benefit, rather than for the benefit
of another.6 See In re Witlin, 640 F.2d 661, 663 (5th Cir. Unit B 1981) (holding,
6
This principle is not unique to Florida law. See, e.g., John Hancock Mut.
Life Ins. Co. v. Watson (In re Kincaid), 917 F.2d 1162, 1166-67 (9th Cir. 1990)
(stating Oregon and Massachusetts laws hold a âsettlor cannot create a spendthrift
trust for his own benefitâ); Herrin v. Jordan (In re Jordan), 914 F.2d 197, 199-200
(9th Cir. 1990) (applying Washington law and holding trust funded by
beneficiaryâs personal injury settlement was not excludable from his bankruptcy
estate as a valid spendthrift trust); Dzikowski v. Edmonds (In re Cameron), 223
B.R. 20, 24 (Bankr. S.D. Fla. 1998) (âIt is axiomatic that under New York Law,
self-settled trusts are void against both present and future creditors and a debtor
may not avoid his creditors, or future creditors, by placing his property in trust for
his own benefit.â); In re Spenlinhauer, 182 B.R. 361, 364-65 (Bankr. D. Me. 1995)
(applying Maine law and holding settlor-beneficiaryâs interest in trust was not
8
under Florida law on spendthrift trusts, debtorâs interest in his Keogh plan was not
exempt from his bankruptcy estate where the debtor was both the beneficiary and
the settlor of the plan);7 In re Wheat, 149 B.R. 1003, 1004-05 (Bankr. S.D. Fla.
1992) (holding, under Florida law on spendthrift trusts, debtorâs deferred
compensation plan was not exempt from his bankruptcy estate where it was self-
funded); In re Williams, 118 B.R. 812, 815 (Bankr. N.D. Fla. 1990) (holding,
under Florida law on spendthrift trusts, debtorâs interests in his employerâs thrift
plan was not exempt from his bankruptcy estate where it was self-settled); JOHN G.
GRIMSLEY, FLORIDA LAW OF TRUSTS § 15-5(b) (4th ed. 1993) (âA settlor cannot
create for himself a spendthrift trust to avoid creditors.â); 55A FLA. JUR. 2D Trusts
§ 78 (2000) (âThe trustee and the sole beneficiary cannot be one in the same under
protected from creditors), affâd, 101 F.3d 106 (1st Cir. 1996); Jensen v. Hall (In re
Hall), 22 B.R. 942, 944 (Bankr. M.D. Fla. 1982) (applying Ohio law and holding
creditors could reach settlor-beneficiaryâs interest in spendthrift trust); Speed v.
Speed, 430 S.E.2d 348, 349 (Ga. 1993) (applying Georgia law, and holding
spendthrift provision in trust created by quadriplegic husband from his insurance
benefits was not enforceable where the husband was both settlor and beneficiary);
Bank of Dallas v. Republic Natâl Bank of Dallas, 540 S.W.2d 499, 501-02 (Tex.
App. 1976) (applying Texas law, and holding settlor who created spendthrift trust
and made herself a beneficiary thereof could not protect her interest in the trust
from her creditors).
7
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en
banc), this Court adopted as binding precedent all decisions of the former Fifth
Circuit handed down prior to close of business on September 30, 1981).
9
spendthrift trust law. A settlor cannot create a spendthrift trust for his or her own
benefit.â).
This limitation comports with the common law of trusts.8 See, e.g.,
RESTATEMENT (SECOND) OF TRUSTS § 156(1) (1959) (âWhere a person creates for
his own benefit a trust with a provision restraining the voluntary or involuntary
transfer of his interest, his transferee or creditors can reach his interest.â); GEORGE
GLEASON BOGERT & GEORGE TAYLOR BOGERT, TRUSTS & TRUSTEES § 223 (rev.
2d ed. 1992) (âIf a settlor creates a trust for his own benefit and inserts a
spendthrift clause, it is void as far as then existing or future creditors are
concerned, and they can reach his interest under the trust.â); ERWIN N. GRISWOLD,
SPENDTHRIFT TRUSTS §474 (1936) (âA spendthrift trust created by a person for his
own benefit is invalid against creditors.â); II AUSTIN WAKEMAN SCOTT, THE LAW
OF TRUSTS § 114 (3d ed. 1967) (âIt is to be noticed that the beneficial interest
reserved to the settlor is for some purposes treated differently from a beneficial
interest created in a third person. Thus, although a beneficial interest created in a
8
Sources setting forth the common law of trusts frequently are cited by
Florida courts for guidance regarding construction of spendthrift and other trusts.
See, e.g., Bacardi v. White, 463 So. 2d 218, 222 (Fla. 1985) (citing RESTATEMENT
(SECOND) OF TRUSTS regarding spendthrift trusts); Waterbury, 32 So. 2d at 605
(citing Bogertâs TRUSTS & TRUSTEES and Griswoldâs SPENDTHRIFT TRUSTS
regarding spendthrift trusts); Gilbert v. Gilbert, 447 So. 2d 299, 301 (Fla. App.
1984) (citing Scottâs THE LAW OF TRUSTS regarding spendthrift trusts).
10
third person may be inalienable by him and not subject to the claims of his
creditors, a beneficial interest reserved to the settlor himself can be alienated by
him or reached by his creditors even though it is otherwise provided by the terms
of the trust.â). Self-settled trusts may be reached by creditors, even if the settlor
was solvent at the time of the trustâs creation and no fraud was intended. See Id.
§ 156 (âIt is immaterial that in creating the trust the settlor did not intend to
defraud his creditors. It is immaterial that he was solvent at the time of the creation
of the trust. It is against public policy to permit a man to tie up his own property in
such a way that he can still enjoy it but can prevent his creditors from reaching
it.â).
In this case, Appellee is a beneficiary of a self-settled spendthrift trust. In
1993, Appellee inherited $250,000 from her mother. To protect the inheritance
from her own squandering, Appellee established a charitable trust under which she
retained the right to receive a 7% income for life. Appellee purportedly was not
insolvent at the time the trust was established; nor is there evidence Appellee
intended to defraud her creditors. Nevertheless, Appellee is both the settlor and a
11
beneficiary of the trust. Consequently, the spendthrift clause contained in the trust
is ineffective as against Appelleeâs creditors.9
2. Interest Reachable by Appelleeâs Creditors
When a settlor creates a trust for her own benefit and inserts a spendthrift
clause, the entire spendthrift clause is void as to her creditors. See BOGERT § 223
(âThe entire spendthrift clause, both as to voluntary and involuntary alienation, is
void. The creditors can reach the settlor-beneficiaryâs interest.â). In the absence of
9
The fact that Appellee cannot exercise dominion over the trust assets is
irrelevant to this analysis. The issue of self-settlement is separate from the issue of control,
and either can serve as an independent ground for invalidating a spendthrift provision. See, e.g.,
In re Spenlinhauer, 182 B.R. at 363 (declining to address beneficiariesâ control over trust where
the trust was self-settled and, therefore, the spendthrift provision was ineffective on that basis
alone); In re Wheat, 149 B.R. at 1004 (âHowever, the Debtorâs degree of control is irrelevant in
this case since one cannot create a spendthrift trust for oneself in Florida.â); Walro v. Striegel (In
re Walro), 131 B.R. 697, 701 (Bankr. S.D. Ind. 1991) (holding self-settlement prevented
agreement from qualifying as a spendthrift trust, although beneficiary did not have any control
over assets).
Although some cases appear to intertwine the issues of self-settlement and
control, those cases are distinguishable because their facts supported invalidity of
the spendthrift trusts at issue under both grounds. See, e.g., Fehlhaber v.
Fehlhaber, 850 F.2d 1453, 1455 (11th Cir. 1988) (citing In re Witlin and other
cases for the proposition that a settlor who creates a trust for his own benefit
cannot protect his interest under the trust from his creditors, but also stating a
settlor who exercises dominion over the trust cannot protect the trust from
creditors); Lawrence v. Chapter 7 Trustee (In re Lawrence), 251 B.R. 630, 641-42
(Bankr. S.D. Fla. 2000) (invalidating spendthrift provision where trust was self-
settled and the beneficiary exercised control over the trust), affâd, 279 F.3d 1294
(11th Cir. 2002); In re Cattafi, 237 B.R. 853, 855-56 (Bankr. M.D. Fla. 1999)
(same). In those cases, there was no need to address the issues as separate grounds
for invalidation.
12
a valid spendthrift provision, a beneficiaryâs interest in a trust is a property right
which is liable for the beneficiaryâs debts to the same extent as her legal interests.
See generally GRIMSLEY § 8-3 (âWhere the beneficiaryâs equitable interest is
vested in him without restraint on alienation, the interest is transferable by him and
subject to claims of his creditors.â); BOGERT § 193 (âIf the trust is active the
creditor of the beneficiary can subject the latterâs interest in the trust to the
satisfaction of the debt, either in law or equity, unless a statute or a valid
spendthrift provision prevents this result.â).
As with any other property right, a trust beneficiaryâs right to receive income
for life is an interest which may be alienated or subject to attachment by her
creditors. See generally Blair v. Commâr of Internal Revenue, 300 U.S. 5, 13-14,
57 S. Ct. 330, 333-34 (1937) (holding that in absence of a valid restraint on
alienation, the interest of a trust beneficiary to income for life was present property
which could be assigned to others); Bradshaw v. Am. Advent Christian Home &
Orphanage, 199 So. 329, 332-33 (Fla. 1940) (holding that in absence of a restraint
on alienation, income stream granted to orphanage as trust beneficiary was subject
to the claims of the orphanagesâ creditors).
13
Where the only interest a settlor has retained for herself under a trust is the
right to income for life, it is solely this interest which her creditors can reach.10 See
II SCOTT § 156 (âWhere the only interest which the settlor has created for himself
under the trust is a right to the income for life or for some other period, it is this
interest alone which his creditors can reach, unless the creation of the trust was a
disposition in fraud of his creditors.â); see also In re Goff, 812 F.2d 931, 933 (5th
Cir. 1987) (indicating creditors of settlors-beneficiaries were limited to attaching
whatever interest the settlors retained under the trust and, therefore, could not
10
Some limited exceptions to this general rule exist which do not apply in
this case. For example, creditors of a settlor-beneficiary who has reserved only a
right to income may reach both the income and the corpus of a trust if the trustee
has discretion to invade the corpus for the benefit of the settlor. See, e.g., Miller v.
Ohio Dept. of Human Servs., 664 N.E.2d 619, 621 (Ohio App. 1995) (holding
entire amount of trust was available to Medicaid even though settlor was given
only income for life, where the trustee in his discretion could expend the principal
on her behalf). Likewise, creditors may reach the corpus of a trust where the
beneficiary is given not only an income stream for life, but also the ability to
designate remaindermen. See, e.g., Bank of Dallas, 540 S.W.2d at 502 (holding
income as well as corpus of an irrevocable spendthrift trust created by the settlor
for her and her childrenâs benefit was subject to garnishment by creditors where
the settlor received all the income from the corpus and held a general power of
appointment exercisable at death); RESTATEMENT (SECOND) OF TRUSTS § 156 cmt.
c (âIf the settlor reserves for his own benefit not only a life interest but also a
general power to appoint the remainder by deed or will or by deed alone or by will
alone, his creditors can reach the principal of the trust as well as the income.â). In
this case, the trustee of the ICRUA does not have discretion to invade the corpus of
the trust for Appelleeâs benefit. Additionally, Appellee does not have a general
power of appointment regarding remaindermen; rather, her right to redesignation is
strictly limited to substituting other Internal Revenue Code qualified charities.
14
obtain a lien on real property conveyed into the trust because settlorsâ interest was
equitable rather than legal); BOGERT § 223 (âIf the settlor creates a trust for the
settlor for life, with a restraint on voluntary or involuntary alienation of his interest,
and with a remainder interest in others at his death, his creditors can reach his life
interest but not the remainder, unless he has also reserved a general power of
appointment.â); GRISWOLD § 475 (indicating creditors could reach a settlorâs life
interest, but not the remainder if vested in another).11 As illustrated in the
Restatement (Second) of Trusts:
A transfers property to B in trust to pay the income to A for life and to
pay the principal on Aâs death to C. By the terms of the trust it is
provided that Aâs interest under the trust cannot be transferred or
11
See also Greenwich Trust Co. v. Tyson, 27 A.2d 166, 173-74 (Conn. 1942)
(âWhile we have found few cases dealing with a situation where the settlor of the
trust, after reserving to himself the income for life, creates vested indefeasible
interests, to take effect at his death, we have found none which subjects such
interests to the demands of the settlorâs creditors, and on principle there is no
question that the creditors cannot reach those interests. Over them the settlor has
no dominion, and his creditors have no more right to reach them than they would
any interests in property formerly owned by him which has passed into the
ownership of another.â); Henderson v. Sunseri, 174 So. 767, 770 (Ala. 1937)
(holding settlorâs creditors could only reach the income stream reserved to the
settlor, and not the remainder which was vested in the settlorâs children); Dillon v.
Spilo, 9 N.E.2d 864, 866 (N.Y. App. 1937) (holding settlorâs reserved life estate
was subject to reach by her creditors, but not the remainder of the trust); Egbert v.
De Solms, 67 A. 212, 212-13 (Pa. 1907) (holding settlorsâ creditors could reach
income from trust which was reserved for settlorsâ benefit, but could not reach the
remainder of the trust which was vested in the settlorsâ children).
15
reached by his creditors. A can transfer his interest; his creditors can
reach his interest.
RESTATEMENT (SECOND) OF TRUSTS § 156 cmt. a, illus. 1.
This result makes sense. Although the spendthrift provision of a trust is void
as against a settlor-beneficiaryâs creditors, the trust itself remains valid. See, e.g.,
In re Goff, 812 F.2d at 933 (holding spendthrift provision was void as against
creditors based on self-settlement, but trust itself was valid); Liberty Nat. Bank v.
Hicks, 173 F.2d 631, 634-35 (D.C. Cir. 1948) (holding settlor-beneficiary was
bound by terms of trust, even though its spendthrift provision was ineffective as
against his creditors); see also 76 AM. JUR. 2D Trusts § 128 (1992) (â[W]here there
is a provision in the terms of the trust imposing restraint on the transfer by a
beneficiary of his interest and the provision is illegal, the provision fails, but the
whole trust does not fail, since provisions like this can ordinarily be separated from
other provisions without defeating the purpose of the settlor in creating the trust.â).
Thus, although a settlor-beneficiaryâs creditors are not bound by a trustâs
spendthrift clause, the assets subject to attachment are circumscribed by the trust
agreement.
By establishing an irrevocable trust in favor of another, a settlor, in effect,
gives her assets to the third-party as a gift. Once conveyed, the assets no longer
belong to the settlor and are no more subject to the claims of her creditors than if
16
the settlor had directly transferred title to the third-party. Where the settlor retains
a right to income payments, however, there is a limited interest created in favor of
the settlor. It is this limited interest, and not the entire trust assets, which may be
attached by the settlorâs creditors:
Life interest in settlor with remainder over to a named or
designated person. The settlor may reserve to himself only the
income from the property transferred during his life and may by the
transfer give a vested remainder after his death to some named person
or persons. This situation arises in the following typical case: A
conveys property to T on trust to pay the income to A during Aâs life,
with restraints against anticipation, assignment, and the rights of
creditors, and with a further provision that on the death of A the
property shall be conveyed to B. Such a conveyance creates in B a
present vested remainder, and if the transfer is not a fraudulent
conveyance, the interest of B can not, of course, be reached for Aâs
debts. The remainder may be to a class, as to the children of the
settlor. It may likewise be contingent until the death of the settlor. In
any of these cases, if the settlor has reserved no power over the
remainder, and the transfer is not fraudulent, the conveyance of the
remainder constitutes a present gift and is just as much beyond the
reach of creditors as any other completed gift.
GRISWOLD § 475.
In this case, Appellee transferred assets of $250,000 into a charitable trust.
The transfer was irrevocable, and the charities listed in the trust became vested in
the corpus of the trust, subject only to divestment through redesignation of other
charitable remaindermen. Appellee retained no rights to the trust principle. In
establishing the ICRUA, however, Appellee granted herself an interest in the trust
17
in the form of a right to receive 7% income from the trust for life. As a result,
Appelleeâs income stream is subject to the reach of her creditors.12 The corpus of
the trust, having irrevocably been conveyed to the trust for the benefit of others, is
not likewise subject to the claims of her creditors.
B. The ICRUA as a Support Trust
In addition to claiming the ICRUAâs spendthrift provision is effective
against her creditors, Appellee asserts the trust is exempt from her bankruptcy
estate as a support trust. âA support trust is one where the trustee is directed to pay
to the beneficiary only so much income or principal, or both, as is necessary for the
beneficiaryâs support and education.â In re McLoughlin, 507 F.2d 177, 185 (5th
Cir. 1975). Support trusts, by their nature, are non-transferrable. Id.; see
also BOGERT § 229 (âIf a trustee is directed to pay or apply trust income or
principal for the benefit of a named person, but only to the extent necessary to
support him, and only when the disbursements will accomplish support, the nature
12
Likewise, her interest vests in her bankruptcy trustee. See II SCOTT §
147.1 (âWhere a beneficiary of a trust becomes bankrupt, his interest under the
trust vests in the trustee in bankruptcy, unless either by the terms of the trust or by
statute there is a restraint on the alienation of his interest. If his interest is
assignable by him or if his creditors can reach it, it vests in the trustee in
bankruptcy.â).
18
of the interest of the beneficiary makes it not transferable and not subject to the
claims of creditors.â).
As an initial matter, the structure of the ICRUA is not in the form of a
support trust. Nowhere in the ICRUA is there a mention of payments by the
trustee for the support of Appellee. Although the monthly income payments are
used by Appellee for her own support, the ICRUA does not limit disbursements to
that effect. Rather, the trustee is merely obligated to pay 7% of the value of the
trust to Appellee each year. The trustee may not pay Appellee more than the 7%
income if her needs exceed that amount; likewise, the trustee may not limit
payments to less than the 7% income. Appellee is entitled to the income payments
regardless of need and may dispose of the funds as she chooses. The ICRUA,
therefore, does not constitute a support trust.
Even if the ICRUA qualified as a support trust, Appelleeâs interest in the
trust would not be shielded from her creditors. As with the ICRUAâs spendthrift
provision, a support trust created by a settlor for her own benefit is ineffective as
against her creditors. See RESTATEMENT (SECOND) OF TRUSTS § 156(2) (âWhere a
person creates for his own benefit a trust for support or a discretionary trust, his
transferee or creditors can reach the maximum amount which the trustee under the
terms of the trust could pay to him or apply for his benefit.â); II SCOTT § 156.1
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(âThe policy which prevents a person from creating a spendthrift trust for his own
benefit also prevents his creating a trust under which his creditors are precluded
from reaching the income or principal which is to be applied for his support.â).
IV. CONCLUSION
When establishing the ICRUA, Appellee made an irrevocable charitable gift
of the trust corpus. By including the right to receive income payments for life,
Appellee retained a portion of the assets for herself. Whatever interest Appellee
retained is her own property, subject to the claims of her creditors. Accordingly,
Appelleeâs right to an income stream is not exempt from her bankruptcy estate and
may be reached by her creditors. The corpus of the trust, however, may not be
reached by Appelleeâs creditors.
AFFIRMED IN PART and REVERSED IN PART.
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