Discretionary and Support and the Rights of the Beneficiary's Creditors

• Author: Browne C. Lewis
• Pages: 122-139

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Chapter 4 - Discretionary and

Support and the Rights of the

Beneficiary’s Creditors

There are several types of private trusts. In this chapter, I will discuss several of the

most common types. One of the primary legal issues that arises as a consequence of the

existence of trust is whether the beneficiary’s creditors can attach the funds in the trust.

Frequently, distributions from the trust may be the beneficiary’s only source of income.

Therefore, getting access to the trust funds may be the sole way for the creditor to get paid.

In this chapter, I will describe the types of trusts in relation to the creditor’s ability to get

paid. A mandatory trust is one that mandates the trustee to distribute all the income and

does not give the trustee the discretion to choose either the beneficiaries or the amount to

be distributed. The trustee’s sole job is to manage and disperse the trust funds. An example

would be: T leaves $500,000 in trust to X to distribute $20,000 of the income to A and B

annually. A and B can go to court to force the trustee to give them the promised amount.

The money in a mandatory trust is similar to earned income, so the beneficiary’s creditor can

file an action against the trust for the amount of the debt.

Lineback v. Stout

, 339 S.E.2d 103

WELLS, Judge.

Respondent argues that it was the testator's intention in Article IV of his will to

create a discretionary trust wherein payments to petitioner were to be in the sole discretion

of the trustee and that the superior court erred in ruling to the contrary. A discretionary trust

is a trust wherein the trustee is given the discretion to determine whether and to what extent

to pay or apply trust income or principal to or for the benefit of a beneficiary. Bogert, The

Law of Trusts and Trustees § 228 (rev. 2d ed. 1979); Scott, The Law of Trusts §§ 128.3, 155 (3d

ed. 1967). Accord N.C. Gen. Stat. § 36A-115(b)(1) (1984). Under a true discretionary trust, the

trustee may withhold the trust income and principal altogether from the beneficiary and the

beneficiary, as well as the creditors and assignees of the beneficiary, cannot compel the

trustee to pay over any part of the trust funds. Bogert, supra; Scott, supra, at § 155. A trust

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wherein the trustee has discretion only as to the time or method of making payments to or

for the benefit of the beneficiary is not a true discretionary trust. Bogert, supra; Scott, supra.

Whether a trust is a discretionary one naturally depends upon the nature of the

powers conferred upon the trustee, that is, whether the powers are mandatory or

discretionary, and if discretionary, the extent of the discretion afforded the trustee. In

determining the nature of the powers conferred upon a trustee, we are guided by the

following:

The powers of a trustee are either mandatory or discretionary. A power is mandatory

when it authorizes and commands the trustee to perform some positive act.... A power is

discretionary when the trustee may either exercise it or refrain from exercising it, ... or when

the time, or manner, or extent of its exercise is left to his discretion. [Citations omitted.]

Woodard v. Mordecai, 234 N.C. 463, 67 S.E.2d 639 (1951).

The court further explained:

The court will always compel the trustee to exercise a mandatory power. ... It is

otherwise, however, with respect to a discretionary power. The court will not undertake to

control the trustee with respect to the exercise of a discretionary power, except to prevent an

abuse by him of his discretion. The trustee abuses his discretion in exercising or failing to

exercise a discretionary power if he acts dishonestly, or if he acts with an improper even

though not a dishonest motive, or if he fails to use his judgment, or if he acts beyond the

bounds of a reasonable judgment. [Citations omitted.] Id.

Whether a power is mandatory or discretionary depends upon the intent of the

settlor as evidenced by the terms of the trust. See Bogert, supra, at § 552; Scott, supra at § 187.

The intent of a settlor is determined by the language he chooses to convey his thoughts, the

purposes he seeks to accomplish and the situation of the parties benefitted by the trust.

Davison v. Duke University, 282 N.C. 676, 194 S.E.2d761 (1973). Use by the settlor of words

of permission or option, or reference to the discretion of the trustee, in describing the

trustee's power indicates that the settlor intended that the power be discretionary, whereas

use of directive or commanding language indicates that a mandatory power was intended. See

Bogert, supra, at § 552. Compare Woodard v. Mordecai, supra, and First National Bank of Catawba

County v. Eden, 55 N.C.App. 697, 286 S.E.2d 818 (1982) (discretionary power) with Kuykendall