Debts of beneficiary

[lyon]

What is the name of your state (only U.S. law)? Michigan

Question: What are the obligations of a third-party trust to pay the debts of a beneficiary (living or deceased)?

Background: A trust was established to help support a beneficiary, with broad powers granted to the trustee to use income and principal as they saw appropriate for the support, care, and maintenance of the beneficiary. The beneficiary is a spendthrift and the trustee has the discretion to distribute any income/principal directly to or on behalf of the beneficiary. In addition, there is language in the trust that states:

The Trustee is hereby vested with full and complete title to all the property in the estate embraced within the Trusts hereof, both as to principal and income therefrom; and further, neither the principal nor income of the Trust estate shall be liable for the debts of any beneficiary hereof, nor shall the same be subject to seizure by any creditor of any beneficiary under any writ or proceedings at law or in equity, and no beneficiary hereunder shall have any power to sell, assign, transfer, encumber or in any other manner anticipate or dispose of his interest in the trust estate or the income produced thereby.

So, to elaborate on my question: Is this language sufficient to protect the assets of the trust from any debts / creditors of the beneficiary? Also, once the beneficiary dies, the remainder of the trust passes to the beneficiary's son free of trust. Does that impact whether the assets (previously) of the trust are at that time subject to any debts / creditors of the beneficiary?

 

[tranquility]

Special needs and spendthrift trusts are not run-of-the-mill items one takes off the shelf. You need professional assistance.

I have no idea if that is enough to establish limited distribution to the beneficiary so that creditors can't reach the corpus or income from the trust. In CA, it would not. But, a review of MANY issues in Michigan law would be required to know if it would work there. A review, or a professional who keeps the edge sharp through continuing education.

 

[lyon]

Thank you for the advice. Will definitely be following-up with an attorney.

For what it's worth, the trust was apparently very poorly constructed and poor legal advice was provided to the settlor by the attorney who wrote it. While it should have been a special needs trust, it does not contain the requisite language. I would suspect the same may be true to meet the requirements for a spendthrift trust. The beneficiary was physically disabled, unemployed, uninsured, unable to support himself financially (no assets whatsoever), and a habitual spendthrift when it was constructed/became effective.