¶ 3801
Overview
Scope of the chapter. A trust that gives the trustee discretion over distributions is the usual instrument by which a family protects an inheritance from the beneficiary's creditors and from the beneficiary's own divorce. The protection depends on a question of classification that American trust law answered one way for more than a century and that the Restatement (Third) of Trusts and the Uniform Trust Code reopened in the first years of this century: whether a beneficiary whose distributions lie in a trustee's discretion holds a property interest that a creditor or a divorce court can reach, or only an expectancy that depends on the trustee's will. This chapter examines that question and its consequences for design. It covers the traditional categories of mandatory, support and discretionary interests and the creditor rules attached to each; the approach of the Restatement (Third), under which the categories collapse into a single continuum of discretion reviewed for reasonableness; the criticism that approach drew and the response of the Uniform Trust Code in section 504; the statutes by which South Dakota, Nevada, Delaware, Wyoming, Ohio and Florida restored or modified the older rules; the treatment of discretionary interests in divorce, with a case discussion of Pfannenstiehl v. Pfannenstiehl; the enforcement of support orders against distributions, with a case discussion of Berlinger v. Casselberry; the design of the trust as a family bank that provides for beneficiaries through use and loans; the beneficiary who serves as trustee; and drafting.
Why the classification matters. The classification of a beneficiary's interest decides three things. It decides whether an ordinary creditor of the beneficiary can obtain any order against the trust, or must wait until property leaves the trust and reaches the beneficiary. It decides which creditors, if any, may obtain an order directing the trustee to pay them, and whether those creditors may argue that the trustee has failed to distribute enough. It decides whether a divorce court may place a value on the interest and divide it as marital property, or may only take the beneficiary's prospects into account in dividing other property and setting support. A spendthrift provision answers part of the first question and none of the others. The protection of a family trust therefore rests on two separate supports: the spendthrift provision, examined in chapter 36, and the discretionary character of the interest, examined here (see supra ch. 36).
Relation to other chapters. Chapter 24 examines distribution standards as instruments of the settlor's intent, including the ascertainable standard of health, education, maintenance and support and the standards of comfort and best interests (see supra ch. 24). Chapter 36 examines spendthrift provisions and the creditors against whom they fail. Chapter 37 examines trusts in which the settlor is a beneficiary, to which the rules of this chapter do not apply without the further conditions of a self-settled spendthrift trust statute (see supra ch. 37). Chapter 5 examines the duty of good faith in the exercise of discretion as part of the mandatory core of trusteeship, and chapter 25 examines the beneficiary's right to information, without which a beneficiary cannot test the exercise of discretion at all (see supra chs. 5, 25). The companion volume, Lighthouse on Asset Protection, examines third-party trusts as asset protection structures in chapter 17 and the beneficiary's divorce in chapter 9; this chapter draws on that treatment and refers to it as the companion volume.
Sources of law. The sources for this chapter are the Restatement (Second) of Trusts, which stated the traditional categories; the Restatement (Third) of Trusts, sections 50 and 60, which replaced them; section 504 of the Uniform Trust Code and its comment, including the 2004 amendment adding subsection (e); the nonuniform statutes of the states that rejected the Restatement (Third) on this subject; and the decisions of courts that have classified discretionary interests in divorce and support cases. The commentary that prompted several of the state statutes is examined in ¶ 3830.