Spendthrift clauses in trusts
Generally, the beneficiary of a trust may voluntarily assign his right to the principal or income from the trust to another person. Similarly, those rights are subject to the claims of his creditors. However, trusts sometimes contain what are known as spendthrift clauses, whereby the settlor restricts the voluntary or involuntary transfer of a beneficiary’s interest. Such clauses are generally enforced and preclude assignees or creditors from compelling a trustee to recognize their claim to the trust.There are several exceptions as, a person cannot put his own property beyond the claims of his own creditors, and thus a spendthrift clause is not effective in a trust in which the settlor makes himself a beneficiary; divorced spouses and minors can compel payment for alimony and child support; creditors who have furnished necessaries to a beneficiary can compel payment and once the trustee distributes property to a beneficiary, and it can be subject to valid claims of others.A trust may give the trustee discretion as to the amount of principal or income paid to a beneficiary. In such a case, the beneficiary cannot require trustee to exercise discretion as desired by the beneficiary.Normally a donor cannot revoke or modify a trust unless he reserves the power to do so at the time the trust is established. However, a trust may be modified or terminated with the consent of the donor and all the beneficiaries.If the donor is dead or otherwise unable to consent, a trust can be modified or terminated by the consent of all the persons who have a beneficial interest only where this would not frustrate a material purpose of the trust. Because trusts are under the supervisory jurisdiction of the court, the court can permit a deviation from the terms of a trust when unanticipated changes in circumstances threaten accomplishment of the donor’s purpose.Generally, with reference to the duties of trustees, a trustee must use a reasonable degree of skill, judgment, and care in the exercise of his duties unless he holds himself out as having a greater degree of skill. In that case, he is held to the higher standard.A trustee may not commingle the property he holds in trust with his own property or with that of another trust. A trustee owes a duty of loyalty, which means that he must administer the trust for the benefit of the beneficiaries and must avoid any conflict of interest between his interests and those of the trust.A trustee must not prefer one beneficiary’s interests to another, he must account to the beneficiaries for all transactions; and, unless the trust agreement provides otherwise, he must make the trust productive. A trustee may not delegate discretionary duties to someone else to perform, such as the duty to select investments.However, the trustee may delegate the performance of ministerial duties such as the preparation of statements of account.The powers of a trustee may be defined by the trust agreement; if they are not, the trustee has all the powers reasonably necessary to carry out the trust. The trustee is personally liable on all contracts made on behalf of a trust unless the contract specifically provides otherwise. However, he is entitled to reimbursement from the trust property for all legitimate expenditures.Dr AbdelGadir Warsama Ghalib is a corporate legal counsel. Email: awarsama@warsamalc.com