October 30, 2014
Authored by: Kathy Sherby and Stephanie Moll
In the case, In re Indenture of Trust dated January 13, 1964, the Settlor’s grandson Milton learned that, just like on the playground, there are no take backs, even when the trust for his benefit contained a spendthrift provision that prohibited voluntary and involuntary transfer of his interest. As the blog, Dumb Little Man Tips for Life, describes the rule, “Once you give something, you can’t ask for it back. Whether it’s a physical gift, a gift of money, or a gift of time, asking for a takeback is pointless. It shows bad faith and makes you untrustworthy.”
While it may seem counter-intuitive to the purpose of a spendthrift provision, in certain circumstances, it may be desirable for a beneficiary of a spendthrift trust to make an assignment of his or her interest in the trust to accomplish other estate planning goals.
The trust at issue was created for the benefit of the Settlor’s three grandchildren, Milton, Steven and Carrie, and included a spendthrift provision prohibiting voluntary and involuntary transfer of a beneficiary’s interest in the trust. In 2000, Milton assigned his entire interest in the trust to his siblings, as trustees of a continuing trust for the benefit of their children, and the trustee distributed $75,000 to Milton in return for this assignment.
In 2012, after the death of Milton’s father (who was the trustee of Milton’s trust prior to the assignment), Milton filed a petition for an accounting of the trust against his siblings, who were then serving as trustees. The trial court granted the trustees’ motion for summary judgment on the basis that Milton no longer had standing to file such a petition because he was no longer a beneficiary of the trust. Milton argued that he remained a beneficiary of the trust because his assignment 12 years earlier was invalid.
On appeal, the Court determined that the spendthrift provision was valid and enforceable because it prohibited both voluntary and involuntary transfers, and ruled that Milton’s assignment was invalid.
The trustees argued that Milton ratified and consented to the assignment by accepting the $75,000 in return for making the assignment. The Court ruled that a beneficiary is not able to consent to or ratify the violation of the spendthrift provision, as such a rule would permit beneficiaries of spendthrift trusts to avoid the effect of a spendthrift provision.
While arguing that the assignment was invalid, according to the Court, an unauthorized or invalid assignment by a beneficiary of his/her interest in the trust is the equivalent of a revocable order to the trustee to pay. The trustees are not liable to Milton for having made distributions prior to his revocation of his order to pay.
If Milton had revoked the assignment prior to the trustees completing the distribution based on the assignment, Milton would have been liable to the assignee, the trust for the benefit of Steven’s and Carrie’s children, for return of the $75,000 Milton received for making the assignment.
The Court also made the following rulings:
• The trustees were not liable for failing to account to Milton for actions taken prior to the revocation of the assignment. The trust had already terminated and been distributed prior to the time the trustees received Milton’s revocation of the assignment. To that extent, distributions, including the total distribution of Milton’s trust to the trust for the benefit of Steven’s and Carrie’s children, prior to Milton’s revocation of his order to pay were valid.
• Milton was barred by the doctrine of laches from challenging the assignment as a breach of trust because the 12 year delay was unreasonable and would result in harm to the successor trustees.