Asset protection and dynasty trusts

This is important, among other reasons, because parents are increasingly leaving their property to children and grandchildren, not outright, but in trust (often for the lives of the beneficiaries) in order to obtain spendthrift protection.

A support trust, which allows distributions only for the support of the beneficiary, typically will offer less creditor protection than a discretionary trust providing that distributions can be made only in the discretion of the trustee. This disparity exists even in states with significant general limitations on the enforcement of spendthrift clauses.

In California, for example, notwithstanding a spendthrift clause, a beneficiary's creditors may reach up to 25% of the payment, income or principal that otherwise would be made to, or for the benefit of, the beneficiary.28 At the same time, however, a creditor cannot compel a trustee to make a discretionary payment to or for the benefit of the beneficiary.29

Likewise, in Oklahoma, "income due or to accrue in the future to the beneficiary" over $25,000 per year is subject to all creditor claims, notwithstanding a spendthrift clause, but a creditor has no rights to a discretionary trust until the trustee exercises discretion in favor of the beneficiary.21 The distinction between support and discretionary trusts does not apply in Virginia, which limits the amount of property that can be sheltered in a spendthrift trust to $600,000.211

Prior to the Sligh decision, only Louisiana and Georgia made a special exception to the spendthrift trust doctrine for tort claims against a beneficiary. Under Georgia law, a spendthrift provision is not valid as to claims against the beneficiary for tort judgments, taxes, governmental claims, alimony, child support, or judgments for necessaries not voluntarily provided by the claimant."'6 Louisiana's statute allows the court to reach a beneficiary's interest in a spendthrift trust to satisfy claims for alimony, child support, necessaries furnished to the beneficiary, or offenses or quasioffenses committed by the beneficiary." The model spendthrift statute proposed by Professor Erwin Griswold in his treatise on spendthrift trusts218, first published in 1936, which proposed an exception for tort creditors, appears to have influenced Louisiana's statute, enacted in 1938.

In Sligh, the Mississippi Supreme Court became the first court to create a common-law exception to the spendthrift trust doctrine for tort creditors. William Sligh, the plaintiff, suffered a broken spine and became paralyzed as a result of a 1993 automobile accident with Gene Lorance, an uninsured motorist who was driving while intoxicated. Lorance was convicted of a felony and given a ten-year sentence, with six years suspended. Sligh and his wife won a default judgment against Lorance for gross negligence and were awarded $5,000,000 in compensatory and punitive damages.

The Holmes County Bank was served with a writ of garnishment, and the proceeding was transferred from Circuit Court to Chancery Court. The Slighs then filed a complaint against the Holmes County Bank, Lorance, and the two remainder beneficiaries, alleging that Lorance's mother had actual knowledge that her son was an alcoholic and also knew that he regularly operated motor vehicles while intoxicated. The Slighs alleged that Lorance's mother created the trusts "as part of her intentional plan and design to enable her son to continue to lead his intemperate, debauched, wanton and depraved lifestyle while at the same time shielding his beneficial interest in the trusts from the claims of his involuntary tort creditors."221 The Chancery Court, upholding the protection provided by the spendthrift clause, ruled in favor of the Holmes County Bank, and the Slighs appealed.