Trust Language (REALLY) Matters
Trusts are written to reflect the specific purpose and operation of the trust. A typical goal is to pass along assets for the benefit of one’s children. To accomplish this, the creator should consider the beneficiaries’ personalities and financial status. Sometimes, passing on assets in a protected environment makes the most sense, and the trust will include a “spendthrift clause.”
While we all have different financial habits, a “spendthrift” is commonly defined as someone who spends money in an extravagant, irresponsible way. Spendthrift clauses limit access to trust funds when there is a concern over how money will be spent by the beneficiary, or who may gain access to the funds if they are freely available. How a spendthrift clause is written is important, as its effect for the beneficiary is significant. Properly drafted spendthrift clauses will allow the beneficiary to receive funds under specific circumstances while providing protection for the trust funds so assets cannot be attached by creditors in the event of a debt, divorce, personal lawsuit, etc.
A recent Nevada Supreme Court case shows us the importance of clear and consistent trust language. In the 2017 case, In the Matter of Frei Irrevocable Trust dated October 29, 1996, 390 P.3d 646 (2017), a spendthrift clause was negated by a trust modification that allowed beneficiaries the absolute right of withdrawal. Mr. and Mrs. Fiore created their trust for the benefit of their combined 10 children (theirs was a second marriage, each bringing 5 children into the union). Following his mother’s death, son Stephen sought a trust modification to allow each of the 10 children an absolute right of withdrawal of his/her trust share. No one objected to this change and the trust was duly modified. Nine of the children subsequently took their shares out of trust, but Stephen left his share in the trust.
Meanwhile, there was a great deal of family drama which led Stephen to settle a lawsuit brought by his step-father and siblings over Stephen’s actions in another family matter. Several payments were made from Stephen’s trust share to satisfy the settlement. Objecting to this use of his trust share, Stephen sued to prevent further payments, claiming the spendthrift clause in the trust protected the assets. The Nevada Supreme Court decided the trust’s spendthrift protections were invalidated once the trust was modified to give beneficiaries the right to withdraw trust funds. Following established Colorado law, the Nevada Court made it clear that it does not matter whether a beneficiary exercises the right of withdrawal; merely possessing the right is sufficient to invalidate the spendthrift clause.
In our opinion, the lesson here is that trust language matters. When establishing a trust, specific language is used to fulfill the creator’s intent. When a change is made to trust language, it is always wise to get qualified advice on the true impact of any new or modified language. At Kling Law Offices, we would be happy to help you evaluate the effects of any trust changes you are considering.
