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United States Court of
Appeals, Eleventh Circuit. In re Jane McLean
BROWN, Debtor. Deborah Menotte,
Plaintiff-Appellant, v. Jane McLean Brown, Defendant-Appellee. No. 01-16211. Aug. 28, 2002. BRIEFS: • Appellant’s Reply Brief (Jan. 28,
2002) • Appellee’s Initial Brief (Jan. 14,
2002) • Appellant’s Initial Brief (Dec. 04,
2001) [*1263] COUNSEL: Morris Gary
Miller, Adorno & Zeder, P.A., West Palm Beach, FL, for Plaintiff-Appellant. David Lloyd Merrill, Cohen, Conway, Copeland, Copeland, Paiva
& Merrill, P.A., Fort Pierce, FL, for Plaintiff-Appellee. Appeal from the United States District Court for the Southern
District of Florida. JUDGES: Before EDMONDSON, Chief Judge, and
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 debtor’s
bankruptcy estate. The corpus of the trust, however, is not likewise subject to
the claims of the debtor’s 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 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 *1264 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, Appellee’s 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
“spendthrift” 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. Upon Appellee’s death, the 7% yearly trust income
payments will be made to her daughter for life. [FN1] At the
daughter’s death, the corpus of the trust will pass to four charities
listed in the ICRUA. Although the ICRUA expressly reserves Appellee’s
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.
[FN2] FN1. The income
payments to Appellee’s 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
daughter’s interest is revoked and terminated, the ICRUA will treat
the daughter as having predeceased Appellee. FN2. 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). 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. [FN3] Rather, Appellee claimed her interest in the trust was
exempt from the bankruptcy estate. Appellant objected, arguing self-funded
trusts are not insulated from the claims of creditors. FN3.
Appellee’s interest in the ICRUA was assigned a value of
“0.00.” On July 26, 2000, the bankruptcy court overruled
Appellant’s objection to the claimed exemption. Based on the presence
of the spendthrift clause, the bankruptcy court concluded Appellee’s
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
beneficiary’s needs. The bankruptcy court rejected Appellee’s
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 *1265 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 court’s 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 been raised on appeal, the
issue of whether the trust qualified as an exempt annuity was not addressed by
the district court. [FN4] This appeal followed. FN4. 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) (“We
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.”). 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
debtor’s 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
debtor’s bankruptcy estate to the extent they are protected from
creditors under applicable state law. [FN5] 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. FN5. See Lichstrahl
v. Bankers Trust (In re Lichstrahl), 750 F.2d 1488, 1490
(11th Cir.1985) (stating the term “applicable nonbankruptcy
law” 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, 119 L.Ed.2d 519 (1992); see also Rep. of
the Comm’n 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 debtor’s bankruptcy estate). A. The ICRUA as a Spendthrift Trust Notes 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, 159 Fla.
754, 32 So.2d 603, 605 (Fla.1947) (en banc) (recognizing the validity of
spendthrift trusts); Croom v. Ocala Plumbing & Elec. Co., 62 Fla.
460, 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 [*1266] by a
beneficiary, however, there is an issue as to whether the trust’s
spendthrift provision is valid as against creditors of the settlor-beneficiary.
We conclude it is not, and the beneficiary’s interest is subject to
alienation by her creditors. 1. Validity of the ICRUA’s Spendthrift Provision as
Against Appellee’s Creditors Spendthrift trusts are defined under Florida law as
“those 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.” Croom, 57 So. at
244 (emphasis added); see also Waterbury, 32 So.2d at 605
(“A 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.”). 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. [FN6] See In
re Witlin, 640 F.2d 661, 663 (5th Cir. Unit B 1981) (holding, under Florida
law on spendthrift trusts, debtor’s 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); [FN7] In re Wheat, 149 B.R. 1003,
1004-05 (Bankr.S.D.Fla.1992) (holding, under Florida law on spendthrift trusts,
debtor’s 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,
debtor’s interests in his employer’s 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) (“A settlor cannot create for
himself a spendthrift trust to avoid creditors.”); 55A FLA. JUR.2D
Trusts § 78 (2000) (“The trustee [*1267] and the sole
beneficiary cannot be one in the same under spendthrift trust law. A settlor
cannot create a spendthrift trust for his or her own benefit.”). FN6. 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 “settlor cannot create a
spendthrift trust for his own benefit”); Herrin v. Jordan (In re
Jordan), 914 F.2d 197, 199-200 (9th Cir.1990) (applying Washington law
and holding trust funded by beneficiary’s 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)
(“It 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.”); In re Spenlinhauer, 182 B.R. 361, 364-65
(Bankr.D.Me.1995) (applying Maine law and holding
settlor-beneficiary’s interest in trust was not protected from
creditors), aff’d, 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-beneficiary’s interest in
spendthrift trust); Speed v. Speed, 263 Ga. 166, 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 Nat’l 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). FN7. 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. This limitation comports with the common law of trusts. [FN8] See,
e.g., Restatement (Second) of Trusts § 156(1) (1959)
(“Where 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.”); George Gleason
Bogert & George Taylor Bogert, Trusts & Trustees § 223 (rev.2d
ed. 1992) (“If 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.”); Erwin N. Griswold, Spendthrift Trusts § 474 (1936)
(“A spendthrift trust created by a person for his own benefit is
invalid against creditors.”); II Austin Wakeman Scott, The Law of
Trusts § 114 (3d ed. 1967) (“It 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 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.”). Self-settled
trusts may be reached by creditors, even if the settlor was solvent at the time
of the trust’s creation and no fraud was intended. See Scott, supra, at
§ 156 (“It 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.”). FN8. 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
Bogert’s
Trusts & Trustees and Griswold’s SpendthriftTrusts regarding spendthrift trusts); Gilbert v. Gilbert, 447 So.2d 299, 301
(Fla.App.1984) (citing Scott’s The Law pf Trusts regarding spendthrift
trusts). 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 beneficiary of the trust.
Consequently, the spendthrift clause contained in the trust is ineffective as
against Appellee’s creditors. [FN9] FN9. 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 beneficiaries’ 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
(“However, the Debtor’s degree of control is irrelevant in
this case since one cannot create a spendthrift trust for oneself in
Florida.”); 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),
aff’d, 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. 2. Interest Reachable by Appellee’s Creditors When a settlor creates a trust for her own benefit and inserts a
spendthrift [*1268] clause, the entire spendthrift clause is void
as to her creditors. See Bogert § 223 (“The entire
spendthrift clause, both as to voluntary and involuntary alienation, is void.
The creditors can reach the settlor-beneficiary’s interest.”).
In the absence of a valid spendthrift provision, a beneficiary’s
interest in a trust is a property right which is liable for the
beneficiary’s debts to the same extent as her legal interests. See
generally Grimsley § 8-3 (“Where the beneficiary’s
equitable interest is vested in him without restraint on alienation, the
interest is transferable by him and subject to claims of his
creditors.”); Bogert § 193 (“If the trust is active
the creditor of the beneficiary can subject the latter’s 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.”). As with any other property right, a trust beneficiary’s
right to receive income for life is an interest which may be alienated or
subject to attachment by her creditors. See generally Blair v.
Comm’r of Internal Revenue, 300 U.S. 5, 13-14,
57 S.Ct. 330, 333-34, 81 L.Ed. 465 (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, 145 Fla. 270, 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 orphanages’ creditors). 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. [FN10] See II Scott
§ 156 (“Where the only interest which the settlor has created
for himself [*1269] 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.”); 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 obtain a lien on real property conveyed into the
trust because settlors’ interest was equitable rather than legal);
Bogert § 223 (“If 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.”); Griswold § 475 (indicating
creditors could reach a settlor’s life interest, but not the remainder
if vested in another). [FN11] As illustrated in the Restatement (Second) of
Trusts: FN10. 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., 105 Ohio App.3d 539,
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 children’s 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 (“If 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.”). In this case, the trustee of the ICRUA does not have
discretion to invade the corpus of the trust for Appellee’s 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. FN11. See also Greenwich
Trust Co. v. Tyson, 129 Conn. 211, 27 A.2d 166, 173-74
(Conn.1942) (“While 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
settlor’s 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.”); Henderson v. Sunseri, 234 Ala. 289, 174
So. 767, 770 (Ala.1937) (holding settlor’s creditors could only reach
the income stream reserved to the settlor, and not the remainder which was
vested in the settlor’s children); Dillon v. Spilo, 275 N.Y.
275, 9 N.E.2d 864, 866 (N.Y.App.1937) (holding settlor’s reserved life
estate was subject to reach by her creditors, but not the remainder of the
trust); Egbert v. De Solms, 218 Pa. 207, 67 A. 212, 212-13 (Pa.1907)
(holding settlors’ creditors could reach income from trust which was
reserved for settlors’ benefit, but could not reach the remainder of
the trust which was vested in the settlors’ children). A transfers property to B in trust to pay the income to A for life
and to pay the principal on A’s death to C. By the terms of the trust
it is provided that A’s interest under the trust cannot be transferred
or 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-beneficiary’s 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) (“[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 [*1270] without defeating the purpose of the settlor
in creating the trust.”). Thus, although a
settlor-beneficiary’s creditors are not bound by a trust’s
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 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 settlor’s 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 A’s 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 A’s
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 in the form of a right to receive 7%
income from the trust for life. As a result, Appellee’s income stream
is subject to the reach of her creditors. [FN12] 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. FN12. Likewise, her
interest vests in her bankruptcy trustee. See II Scott § 147.1 (“Where 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.”). B. The ICRUA as a Support Trust In addition to claiming the ICRUA’s spendthrift provision
is effective against her creditors, Appellee asserts the trust is exempt from
her bankruptcy estate as a support trust. “A 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 beneficiary’s support and
education.” In [*1271] re
McLoughlin, 507 F.2d 177, 185 (5th Cir.1975). Support trusts, by their
nature, are non-transferrable. Id.; see also Bogert § 229
(“If 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 of the
interest of the beneficiary makes it not transferable and not subject to the
claims of creditors.”). 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, Appellee’s
interest in the trust would not be shielded from her creditors. As with the
ICRUA’s 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) (“Where 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.”); II Scott
§ 156.1 (“The 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.”). 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, Appellee’s 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 Appellee’s
creditors. AFFIRMED IN PART and REVERSED IN PART. |