Spendthrift Trust Clauses and Kansas Divorces: Does a Settlor’s Intent Still Matter?
| Publication year | 2012 |
| Pages | 19 |
Calvin J. Karlin and Anna Smith
[19]
Does a spendthrift clause protect trust assets from property division or claims for maintenance or child support? Is a divorcée treated like any other creditor? Does public policy demand that the family be assured adequate resources despite a settlor’s ability to restrict the disposition of his or her own property?[1] What is the effect of the Kansas legislature omitting the sections of the Uniform Trust Code (UTC) regarding this from the Kansas Uniform Trust Code (Kansas UTC)? This article will provide background and analysis of these issues.
This article addresses only Kansas law. Consequently, there is no discussion of offshore trusts[2] or domestic asset protection trusts in those states that protect trust settlors from creditor claims.[3] Also beyond the scope of this article are the exempt status of qualified retirement plans and the procedure for dividing them by Qualified Domestic Relations Orders (QDROs), federal Social Security benefits, and military retirement pay.
I. Background
A. K.S.A. 58a-502
The Kansas UTC recognizes the validity of a spendthrift provision in a trust.[4] Stating that a beneficiary’s interest is held subject to a “spendthrift trust” or using words of similar import “is sufficient to restrain both voluntary and involuntary transfer of the beneficiary’s interest.”[5] A spendthrift provision thus not only prevents a trust beneficiary from withdrawing or transferring an interest in the trust but also precludes a creditor or assignee of the beneficiary from reaching trust property or distributions prior to receipt by the beneficiary.[6] Additionally, a creditor cannot compel a distribution that is subject to the trustee’s discretion.[7] That is so “whether or not a trust contains a spendthrift provision.”[8] That means that with discretionary trusts, the nature of the beneficiary’s interest is considered more determinative than the settlor’s intent to restrain alienation. With a spendthrift trust, the beneficiary may have an absolute right to distributions of income, principal, or both, whereas the beneficiary of a discretionary trust does not have a right to distribution until the trustee exercises discretion.[9] Consequently, courts are more likely to allow claims for spousal maintenance and child support against spendthrift trusts than against discretionary trusts.[10]
B. In re Watts
A divorced spouse seeking alimony (now called “maintenance”)[11] could not reach the corpus of a discretionary testamentary trust according to the Kansas Supreme Court in In re Watts.[12] The Court distinguished a discretionary trust from a spendthrift trust.[13] In Watts, the beneficiary could not compel distributions from the trust, which were subject to the trustee’s determination that the beneficiary had “sufficient business judgment” to handle them.[14] That the Watts decision involved the trust’s principal (corpus)[15] should not preclude its application to a divorcée’s claim against discretionary income payments from a trust, as the Kansas Supreme Court quoted a Restatement provision that recognized that a transferee or creditor of the beneficiary could not overcome the trustee’s discretion and compel distributions of income or principal.[16] Consequently, no creditor, including a divorced spouse, should be able to compel a distribution of principal or income from a discretionary trust in Kansas.
C. Restatement (Third) of Trusts
The Restatement (Third) of Trusts firmly takes the position that a beneficiary’s children, spouse, or former spouse can reach his or her beneficial interest in a spendthrift trust to satisfy an enforceable claim against the beneficiary for support and maintenance.[17] That is based upon a public policy of not permitting the beneficiary to enjoy benefits while neglecting the support of a dependent.[18]
The UTC takes the same position as the Restatement.[19] Both reflect the majority rule.[20] Twenty-four states have adopted the UTC.[21] However, most states have modified the sections that relate to spousal attachment (Sections 503 and 504) to conform to their own common law.[22]
D. The Law Outside Kansas
The United States Supreme Court has noted “the basic principle that a beneficiary’s interest in a spendthrift trust ... can be reached in the context of divorce and separation.”[23] Considerable case law from many states supports an exception allowing a child or dependent spouse to reach the accrued trust income and trust income to accrue in the future.[24] A few of those courts have reached that decision only if the creator of the trust intended that the dependents be supported out of trust income.[25] On the other hand, there are some states that have refused to allow a spouse to reach the trust assets when there is a spendthrift clause.[26] The Illinois Supreme Court and the Alabama Court of Appeals have created a hybrid rule, in which the spendthrift interest can be reached for child support but not alimony.[27]
E. Kansas Uniform Trust Code
When the Kansas legislature adopted the Kansas UTC, it omitted Sections 503 and 504 of the uniform act. Sections 503 and 504 address the effect of spendthrift provisions and discretionary trusts on claims for child support and spousal maintenance. Section 503(b) of the UTC states that, “A spendthrift provision is unenforceable against ... a beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance.”[28] Such claimant “may obtain from a court an order attaching present or future distributions to or for the benefit of the beneficiary.”[29] The comment to that section notes that distributions subject to attachment include distributions required by the express terms of the trust, such as mandatory payments of income, and distributions that the trustee has otherwise decided to make, such as through the exercise of discretion.[30] However, Section 503(b) does not purport to authorize a spouse or child claimant to compel a distribution from the trust. Furthermore, Section 503(b) is limited to a court order for support or maintenance and thus does not apply to the division of property in a beneficiary’s divorce.[31]
Section 504 of the UTC creates an exception to the general rule that creditors may not reach a beneficiary’s interest in a discretionary trust, but only for a creditor who is a spouse, former spouse, or child of the beneficiary with a judgment or court order for support or maintenance and the trustee has either not complied with a standard for distribution or has abused the trustee’s discretion.[32] That section applies [20] regardless of whether the trust contains express provisions to guide the trustee in exercising its discretion.[33] However, the UTC provides little help on what a spouse or child claimant would have to show to establish an abuse of discretion or failure to comply with a standard for distribution, an especially difficult task when the trust provides no standards for distributions.[34] If the claimant can establish the trustee’s abuse or failure, the comment to Section 504 notes that the court must direct the trustee to pay the claimant an equitable amount under the circumstances but not in excess of the amount the trustee was otherwise required to distribute to the beneficiary, keeping in mind that the family court has already considered the respective needs and assets of the family in setting the support award.[35]
The impact of the Kansas legislature’s omission from the Kansas UTC of UTC Sections 503 and 504 on a divorced spouse’s ability to attach a beneficiary’s interest in a spendthrift trust is not entirely clear. The Kansas Judicial Council supported adoption of UTC Sections 503 and 504, but the Kansas Bar Association objected.[36]
Before the enactment of the Kansas UTC, the Kansas Supreme Court, in State ex rel. Secretary of SRS v. Jackson,[37] followed the Second Restatement of Trusts’ spendthrift exception for “the United States or a state to satisfy a claim against the beneficiary,” which is also a part of UTC Section 503.[38] The Jackson Court quoted all of the Restatement’s exceptions to spendthrift provisions,[39] which may indicate that it would have approved the other exceptions, including the spousal exception, had those matters been before it. In addition, the Kansas Judicial Council has suggested that the Jackson Court approved all of the exceptions[40] (including the spousal exception, although it was not actually before the Court).
The Kansas Judicial Council concluded that UTC Section 504(c) would modify existing Kansas law on discretionary trusts as set forth in Watts v. McKay.[41] Instead of adopting UTC Section 504, the Kansas legislature left it out, but added a provision to Section 502 providing:
Whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee’s discretion even if: (1) the discretion is expressed in the form of a standard for distribution; or (2) the trustee has abused the discretion.[42]
In Watts, the Kansas Supreme Court had noted an existing conflict of authority on whether a former spouse could reach the interest of a beneficiary of a spendthrift trust to satisfy a judgment for alimony.[43] However, because the Watts court concluded that the trust before it was discretionary, it did not reach the spendthrift question.[44] The Watts opinion approvingly cited the Restatement[45] as to discretionary trusts, however.
Did the Kansas legislature’s intentional omission of UTC Sections 503 and 504 signify a rejection of the Restatement principles set forth therein?[46] Does that mean that a spousal creditor cannot attach trust distributions even after the...
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