The Unnatural Nature of the Spendthrift Trust

[First published 2005 – republished Dec 8 2014]

American trust law should be reformed.  The “trust” constitutes a form of property ownership which is antithetical to American concepts of private property.  The goals of the trust for the most part can be accomplished by other means which are less complex, less subject to varying interpretations, and therefore, less of a windfall for the lawyer industry. And, in the case of spendthrift trusts – which are of questionable consitutionality and contrary to public policy – there is a more pressing need for change.

TRUSTS IN GENERAL

The Anglo-American Trust is a unique “social” institution. Complexities arise immediately in dealing with trusts, because the trust is itself a unique manner of property ownership. Its unnatural nature and the legal complexities which arise from this institution combine to make trust law a big moneymaker for the lawyer industry with no corresponding public (or private) benefit.  Survey of Law Firm Economics (Altman, Weil Pubs., New Town Square, PA, 2002) reports at chapter IV (“Compensation”) that the average (nationwide) annual compensation for law firm partners specializing in Trusts and Estates is $232,450.00 (and approx. $100,000.00 for associates).

What is a trust? Trusts are in their essence a “social institution”, an “appropriation of property”, “thoroughly different from the idea of private ownership”. See LePaulle, An Outsider’s View Point of the Nature of Trusts, 14 Cornell Law Quarterly (1928-1929) p. 52-61.

Trusts are opposed to the law of property because property law is based on individualism. Trusts involve duties of ownership (on the trustee) which are opposed to private ownership (which is “the consecration of individualism”): “. . .. two elements quite foreign to the idea of individual ownership are inherent to the trust; the first one is the right to follow the res in its economic transformations. The res, in case of ownership, is a concrete, definite thing, whereas, in case of trust, it is a somewhat intangible economic element that can take successively different forms . . . the object of private ownership is concrete, the object of trusts is intangible. . . . private ownership is the consecration of individualism: . . . Ownership means freedom: even anti-social freedom . . Trusts involve the duty of preservation, of good management, of production: it has a social value by which it opposes itself to ownership. The two legal institutions have back of them two profoundly different and even opposed philosophies. . . . We may therefore conclude on this point in saying that Anglo-Saxon countries have two different regimes for property: individual ownership and trusts.” (Outsider’s View Point at 58). Therefore, mechanical application of general legal principles to trusts – as if they were governed by private property law instead of by trust law – may lead to unsound conclusions. “. . . trusts form a logical whole if one does not try to force them into frames that are not fitted for them.”(Outsider’s View Point at 61).

Often an interest in a trust is defined by a clause in the declaration of trust such as the following: “The beneficiaries shall take no estate nor interest in the trust property and their interests hereunder are personal property only, consisting of the right to enforce the due performance of this trust.”  In such a case then (precisely stated)  the beneficiary’s interest in the trust consists of “the right to enforce the due performance of the trust”. The beneficiary’s “Trust Interest” is simply a “chose in action” or “thing in action”. However, he also has something more, in addition to this. As, for example, an income beneficiary of a trust, the beneficiary also has an equitable interest in a share of the trust income.

THE SPENDTHRIFT TRUST

Spendthrift provisions and the statutes which support them are contrary to public policy and unconstitutional. The First Amendment right of association also includes the right to not associate. Imagine what someone could do to an enemy by making him beneficiary of a spendthrift trust, where the residual beneficiary – after the beneficiary’s demise – is the Mafia or some other violent gang.

Spendthrift provisions contravene the general policy which forbids restraints on alienation and the non-payment of honest debts: “It [a spendthrift trust] is exceptional in its very nature, because it contravenes that general policy which forbids restraints on alienation and the non-payment of honest debts. . . . Clearly, it is against public interest that the property of an after generation shall be controlled by the deed [qu. dead] of a former period, or that the non-payment of debts should be encouraged.”  (Overman’s Appeal, 88 Pa. St. 276, quoted in Gray, Restraints on the Alienation of Property (Boston, Soule & Bugbee, 1888), p.148).

Spendthrift doctrine rests on an unsound legal basis: “The doctrine has been built up entirely on obiter dicta.” (Gray at 149).

A restraint on the alienation of an equitable estate is as much against public policy as is a restraint on the alienation of a legal estate: “A restraint on the alienation of an equitable estate is as much against public policy as is a restraint on the alienation of a legal estate. Certainly no one has ever shown a distinction. . . . the doctrine that an equitable life estate may be created inalienable and free from liability for debts, if it be law, is an anomaly without support from analogy, either at common law or in equity.”(Gray at 168).

It is not only a fraud on the creditors, but it is against public policy, that someone should have the benefits of wealth without the responsibility to pay his honest debts: “And this leads to the consideration of a fallacy . . .that the only objection to such inalienable life estates is that they defraud the creditors of the life tenant; and the courts labor, with more or less success, to show that these creditors are not defrauded . . . But, . . . this is not the ground why equitable life estates cannot be made inalienable and free from debts. The true ground is the same on which the whole law of property, legal and equitable, is based; – that inalienable rights of property are opposed to the fundamental principles of the common law; that it is against public policy that a man ‘should have an estate to live on, but not an estate to pay his debts with’ . . . that a man should have the benefits of wealth without the responsibilities . . .” (Gray at 169).

The property in trust may still, somehow, be controlled by the deceased person but the debts are the beneficiary’s debts, and it is the beneficiary – not the deceased – who is (or should be) responsible for paying them, and who is morally obligated to pay them, and who sometimes even wants to pay them but cannot because of the spendthrift provision. “The argument, therefore, that the property devised or settled belonged to the testator or settlor, and that he could do as he would with his own, is entirely beside the point. . . . He could not devise or settle it for an unlawful purpose, such as a gift for a public or private nuisance, . . . A. cannot devise a legal life estate with a provision that it shall not be subject to the devisee’s debts. Why not? . . . The debts are not the debts of the testator. . . .Yet it is not disputed that these devises are bad; but they are bad for no other reason than that for which a devise of an equitable life estate with a provision that it shall not be subject to the devisee’s debts is bad, namely, that such a provision is against public policy and illegal, . . . A testator may give such rights of property as he pleases, provided they are rights which the law sanctions; but inalienable rights of property the law has never sanctioned, for they are inconsistent with that ready transfer of property which is essential to the well-being of a civilized community, and especially of a commercial republic.” (Gray at 170-171).

The doctrine that a person’s rights of property should be used to pay his debts is a cornerstone of law and morality, the contravention of which is corruptive to society and to the individuals involved. “The object of spendthrift trusts is to enable the children of rich men to live in debt and in luxury at the same time. The cestui que trust of a spendthrift trust is not likely to become a valuable citizen.” (Gray at 174).

These objections by Professor John Chipman Gray in 1888 have never been satisfactorily answered.

Another objection to the trust is the obvious opportunities for abuse by the trustee (who has control over the actual trust corpus). Trustees are often trust departments of banks who can afford to marshal an army of lawyers to shield them while they milk the trust. Theoretically, of course, they are under strict constraints and are held to a much higher standard than an ordinary fiduciary would be. A trustee must display complete loyalty to the interest of the beneficiary:

“Perhaps the most fundamental duty of a trustee is that he must display throughout the administration of the trust complete loyalty to the interests of the beneficiary and must exclude all selfish interest and all consideration of the interests of third persons. A distinguished jurist has expressed this concept in classic language: ‘Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions . . . Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.” (BOGERT, Law of Trusts and Trustees §543).

“The most fundamental duty owed by the trustee to the beneficiaries of the trust is the duty of loyalty. This duty is imposed on the trustee not because of any provision in the terms of the trust but because of the relationship that arises from the creation of the trust. A trustee is in a fiduciary relation to the beneficiaries of the trust. There are other fiduciaries, such as guardians, executors or administrators, receivers, agents, attorneys, corporate directors or officers, partners, and joint adventurers. In some relations the fiduciary element is more intense than in others; it is peculiarly intense in the case of a trust. It is the duty of a trustee to administer the trust solely in the interest of the beneficiaries.” (II A SCOTT, The Law of Trusts, 4th ed. §170,emphasis added). Likewise, under CAL.PROB.CODE §16002, a trustee has a duty of loyalty to the trust beneficiaries. CAL.PROB.CODE §16002(a) states the following:“(a) The trustee has a duty to administer the trust solely in the interest of the beneficiaries.”.

The trustee’s very existence as trustee of the trust is solely to serve beneficiary’s interests. In Matter of Estate of Gump (1991) 1 Cal.App.4th 582, it was held that a professional trustee commits a knowing breach of the duty of loyalty by merely threatening to charge an audit solely to beneficiary’s income share. In actual practice, however, judging by the large number of lawsuits brought by beneficiaries against their bank trustee’s the opposite is the case. The lone beneficiary is no match for the banks and their armies of lawyers (not to mention the judges coming from the same lawyer industry). See, for example, the web site http://www.citynationalstory.com describing a case (In re Fannie Borun Trust) of abuse and corruption regarding administration of a spendthrift trust.

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