Q: What's the legality of spendthrift trusts in Michigan?
A
spendthrift trust is a way to protect assets from creditors. Generally,
a trust is established by someone – the settlor - for the benefit of
someone else – a beneficiary. The trustee is the person who oversees the
trust assets for the beneficiary according to the instructions in the
trust by the settlor when it was made.
The
“spendthrift” provision of the trust means that the beneficiary has no
control over distribution, and trustee can’t make a distribution to a
beneficiary unless certain conditions are met. When spendthrift trusts
first began to be used, they were looked on as being necessary only for a
beneficiary who had some disadvantage – like incompetence, or
incapacity. However courts quickly expanded that original definition to
allow the settlor’s intent to be carried out whenever possible.(See Norton Annual Survey of Bankruptcy Law, 2011, p. 2. Available at: http://furrcohen.com/wp-content/uploads/2011/10/Norton-Annual-Survey-2011.pdf.
Spendthrift Trusts and Bankruptcy
The
Bankruptcy code has been drafted as broadly as possible to include as
much of the debtor’s assets as is possible in the bankruptcy estate.
However, if the debtor is the beneficiary of a spendthrift trust, that
changes the creditor’s ability to collect. Being a debtor who is also a
beneficiary of a spendthrift trust, the assets and income of the trust
are an exception from the bankruptcy estate. Id. See also Restatement of Trusts, § 58 (2).
If
the beneficiary has creditors who are waiting to seize/ attach assets
once a distribution is made, the trustee can wait to make a
distribution. So the assets, once distributed, will all go to the
beneficiary.
Spendthrift Trusts and Michigan Law.
Currently
Michigan only allows a spendthrift trust provision when the beneficiary
is someone other than the settlor. This means that if a settlor wanted
to create a spendthrift trust that was used to keep the settlor’s assets
shielded from creditors for the settlor’s own benefit, it would not be
recognized under current Michigan law as a valid trust. So the creditors
of the settlor could “pierce” a self-settled trust in a court action.
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