The issue in Calhoun v. Rawlins (June 2018) was whether the assets of an irrevocable spendthrift trust were available to satisfy any damages awarded in a subsequent personal injury action against the former husband. The Court held that all the assets of the trust were available to satisfy such an award.
The parties were married in 1987. During the marriage, Wife supported the family with her income from employment and her assets, some of which derived from trusts from her grandfather of which she was the sole beneficiary. In 2001, Husband was involved in a motor vehicle accident and sustained a traumatic brain injury which rendered him unable to make or communicate medical and other decisions for himself. He had cognitive impairment in attention, memory and executive functioning.
In 2004, Husband and Wife separated. In 2005, Husband filed for divorce and requested an equitable division of the marital assets. The case settled. Pursuant to the settlement agreement, Wife transferred significant assets in her name to a spendthrift trust created for the benefit of Husband. The trust was created in 2007. The trustees were given “complete discretion to distribute as much of the income and principal of the assets in the trust as they felt were necessary to meet the reasonable needs” of Husband. The trust identified Wife as the settlor, Husband as the beneficiary and the parties’ children as the remainder beneficiaries.
In 2014, Husband was involved in another motor vehicle accident and died. Husband was responsible for the crash. The passengers in the vehicle which he hit sustained serious injuries and sued his estate. They sought a judgment declaring that the assets of the trust were available to them to satisfy a damages award. The lower court ruled that only those assets which Husband had contributed to the trust could be reached. The decision was appealed.
The Appeals Court distinguished between spendthrift trusts created by third parties and those that are self-settled by an individual who is both a settlor and a beneficiary. A trust created by a third-party beneficiary may protect a beneficiary’s interest in the trust from creditors through spendthrift provisions. “The theory behind the enforcement of these spendthrift trusts is that the settlor of a trust is the absolute owner of this property and, in giving a gift, has “the entire right to dispose of it, either by an absolute gift … or by a gift with such restrictions or limitations, not repugnant to law, as he [sees] fit to impose.”” [Citation omitted].
A trust where the beneficiary is also the settlor, however, cannot be used to protect one’s assets from creditors. “The established policy of this Commonwealth long has been that a settlor cannot place property in trust for his own benefit and keep it beyond the reach of creditors.” [Citation omitted].
Thus, the Court’s decision in this case turned on whether the trust at-issue was settled by Wife or was self-settled. The Court determined that for a trust to be considered “self-settled”, the beneficiary need not convey the property to himself. The beneficiary need only provide consideration. “A trust is established by the person who provides the consideration for the trust even though in form it is created by someone else.” [Citations omitted]. “[I]t is the beneficiary’s entitlement to the settlement proceeds, not whether they were literally paid into his hands, that indicates whether the beneficiary funded the trust.” [Citations omitted]. Thus, the labels in a trust instrument are not determinative. Instead, the court must look to the facts surrounding the creation of the trust.
In Calhoun, the fact that the trust identified Wife as the “settlor” or that her assets had been held in her name alone rather than as marital assets did not mean that she was settlor. In fact, she was not. Wife transferred assets to the trust in order to settle her obligations to Husband arising out of the marital relationship. She did not give them as a gift. The funds transferred to the trust represented the agreed-upon equitable division of the marital estate.
As the Court noted, Wife was not gifting assets to Husband. She was satisfying her obligations arising from the marriage. “An agreement that settles the rights of divorcing spouses with regard to property, maintenance, and support is based on valuable consideration. [Husband’s] agreement to settle was the consideration for the creation of the trust.” The fact that Husband’s guardian facilitated the agreement was immaterial.
Thus, the Court determined that Husband was the settlor. “[Husband’s] legal and equitable rights in the settlement of the parties’ rights and obligations upon dissolution of the marriage was the impetus behind the creation of the trust and, therefore, he properly is considered the settlor.” The Court also confirmed that an interest in trust property established by a parent or grandparent may comprise part of the marital estate for purposes of possible division.
The Court stated: “If, as it would appear, their intent was to keep [Husband’s] funds out of the hands of his creditors, they would not do so by transferring his share of the marital estate into a spendthrift trust over which the trustees had discretion to pay to him both the principal and the interest of the trust during his lifetime.” [Citation omitted]. The fact that Husband had been placed under guardianship did not exempt him from the rule.