In the great majority of our trusts, you will see the terminology “as the Trustees shall deem advisable, in their sole and absolute discretion.” These words reference the power granted to Trustees to make distributions to beneficiaries based on their sole and absolute discretion. While this may seem restrictive, in that it creates a barrier to a beneficiary receiving their funds, we do this for protection of the trust, protection of the Grantor, and protection of the beneficiary. The debate continues as to the true meaning of discretion. However, in a recent case, In re McCoy, the Courts once again have made it clear that if a beneficiary falls in to creditor trouble, what is in the beneficiaries control is subject to the creditor’s garnishment.
In re McCoy, a bankruptcy case in the Western District of Wisconsin, subjected a decedent’s revocable trust to the bankruptcy Court’s scrutiny. In this case, the trust granted the Trustee power to make an annual distribution of $20,000 to the Grantor’s daughter. Upon the Grantors death, the Grantor’s daughter found herself in serious creditor trouble, which ultimately led to bankruptcy. During the bankruptcy proceedings, the creditors argued that all future annual distributions of $20,000 to the daughter should become the property of the creditor. While the Court agreed that all distributions made would become subject to creditor claim, the Court disagreed that the creditor could compel the Trustee to make such distributions should they choose not to. Ultimately, the Court held that those funds already possessed by the daughter were subject to creditor claims. However, because the Trustee was given absolute discretion to make annual distributions, the Trustee could not be compelled to make such distributions. Therefore, when annually the Trustee chooses not to make such distributions, the creditor has no authority to compel the Trustee to do so.
The importance of good planning in this instance is the establishment of a purely discretionary trust which offers maximum asset protection. In order to truly accomplish this, one must appoint a Trustee who they are confident will carry out the wishes of the Grantor. This eliminates the fear of creating a boundary for beneficiaries to have access to the trust proceeds while eliminating the threat of capture by the beneficiaries’ creditors. In re McCoy confirms that Courts are reluctant to compel distributions to creditors if the proper discretionary language is present. Thus, for your safety and the safety of your beneficiaries, please review your documents to make sure the requisite level of discretion is present.
– Gary Altman, Esq. and Adam Abramowitz, Esq.