The most notable benefit of being a trust beneficiary is the ability to receive trust distributions. Determining your distribution rights, however, can sometimes be difficult to determine, particularly where the terms of the distributions are not explicitly stated in the trust documents.
Rights of Beneficiaries to Trust Distributions
Determining the distributions rights of the trust beneficiaries is not always cut and dry. Where the trust documents state, “$10,000 is to be distributed to each of my children every year for life,” or “the income of the trust is to be distributed to my wife annually” determining distribution rights is easy. Trusts with these types of requirements are often called mandatory trusts because the distribution amounts are stated and mandatory.
When dealing with trust distributions, mandatory trusts generally present the least amount of confusion and controversy. There are, however, other circumstances where distributions rights may be unpredictable and subject to dispute.
Some trusts, known as discretionary trusts, provide extended discretion to the trustee in determining the amount of the distributions to be made to the beneficiaries. These trusts often contain language similar to the following: “Trust property is to be distributed to my children at a time and in an amount determined by the trustee in his absolute discretion.”
Where such extended discretion exists, the trustee has wide discretion in determining how much should be distributed to the each beneficiary, if anything is to be distributed at all. Unless the trustee makes decisions beyond the realms of reasonableness or in a state of mind not contemplated by the trustee, courts will generally respect the decisions of the trustee.
Rights of the Beneficiary’s Creditors to Distributions
When the trust beneficiaries are in debt, the question becomes whether a creditor may access the trust property to satisfy the debts owed. In these circumstances, the ability of the beneficiary’s creditors to receive trust distributions will depend upon the terms of the trust. Generally, when dealing with mandatory trusts discussed above, the beneficiary’s creditors can gain access to the beneficiary’s distributions made in accordance with the terms of the trust.
The creditor generally cannot, however, simply raid the trust. They may only stand in the beneficiary’s shoes and receive distributions in their stead as they are made.
There are, however, three main types of trusts where the rights of the creditors are not as certain and will depend more specifically on the nature and terms of the trust: discretionary trusts, support trusts, and spendthrift trusts.
A beneficiary’s creditors can compel trust distributions only to the extent that the beneficiary can. A creditor cannot generally obtain more rights to property than the debtor has. Nevertheless, as with mandatory trusts, creditors can take trust proceeds in place of the beneficiary.
Support trusts are set up for the support of the beneficiary and are generally established for disabled beneficiaries. Creditors cannot compel distributions from a support trust or take proceeds in place of a beneficiary—though in some cases, suppliers of necessaries, such as food and shelter, can.
Spendthrift trusts are trusts designed to deny both the beneficiary the right to dispose of his interest in the trust and the ability of the beneficiary’s creditors to access the trust. They are often set up for beneficiaries the settlor of the trust believes to be irresponsible with money, and are in fact often designed to pay third parties on the behalf of beneficiaries rather than providing distributions of cash to the beneficiaries themselves.
Such spendthrift trusts are valid—meaning that creditors cannot gain access to trust property—except as to:
- Contracts for necessaries, such as food and rent.
- Child support and alimony obligations.
- Any interest retained by the settlor, such as with revocable trusts.
- Federal tax liens.
Self-settled spendthrift trusts, also known as self-settled asset protection trusts, are designed to allow the settlor of the trust to protect his assets from his own creditors. Only a small number of states, however, recognize the validity of such trusts, and Arkansas is not one of them.