By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Trust Law Attorney
One of the new provisions of the Uniform Trust Code as adopted in New Jersey addresses the relationship between creditors and trust beneficiaries. Creditors can execute upon a beneficiary’s interest in the trust, and any distributions made from the trust by the trustee based on the language of the governing trust document. The law limits the way creditors can execute upon the interest of a beneficiary. If the trust contains a spendthrift provision, which is a provision in a trust banning the beneficiary from transferring his or her interest in the trust voluntarily or involuntarily, creditors cannot execute upon the interest. Instead, creditors must execute upon the money once it is in the hands of the beneficiary.
Under the law, creditors cannot compel a trustee to make a distribution to the debtor-beneficiary even if the trustee has discretion to do so. But the creditor can execute upon distributions made to a beneficiary if mandated under the trust’s governing document. So for example, if a trust directs that $500 a week is to be paid to a beneficiary who is also in debt, and allows the trustee to give the beneficiary any other money “if the beneficiary needs it for his health and well-being,” the creditor is entitled to that $500 a week, and can file a writ of execution against that distribution. But the creditor has no power to compel the trustee to make a distribution of money intended for the beneficiary’s well-being. If the creditor feels the trustee is holding money back, the creditor can sue to order the trustee to make additional distributions because the trustee is abusing his discretion granted by the trust document. But the creditor cannot just execute upon the money sitting in the trust or force the trustee to make distributions.
So what about claims of creditor against the person who created the trust and funded the trust? To determine what the creditor can go after, it is important to point out that a spendthrift provision is irrelevant to the analysis, since it only affects the interest of beneficiaries. If the trust is revocable or a portion of it is revocable, creditors can freely execute upon the property in that trust. Otherwise, if the property is placed in an irrevocable trust, the only property that can be executed upon by creditors is anything that is distributed by the trust to the person who placed it in the trust. Unless property was moved into the trust for the purposes of not having it available for creditors, the trust acts a “safe haven” of sorts, protecting the property from future creditors. It is why the irrevocable trust is an effective estate planning tool.
To discuss your NJ Trust Law matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at email@example.com. Please ask us about our video conferencing consultations if you are unable to come to our office.