Opinion ID: 2105497
Heading Depth: 2
Heading Rank: 1

Heading: The 1929 Trust

Text: We turn, then, to the question of whether the protective provisions of the 1929 trust are sufficient, when operative, to create a discretionary trust that would be valid and enforceable. The 1929 trust in fact established five separate trusts, only three of which are here involved. Frances W. Budlong, a daughter of the decedent, was the income beneficiary of one of these trusts; John Budlong, a son of the decedent, now deceased and the father of the present defendant John Budlong of New York, was the income beneficiary of another of these trusts; and still another inured to the benefit of Milton Joseph Budlong, the decedent's incompetent son of whose estate First National Bank of Arizona is guardian. All of these are referred to in the trust indenture as `principal beneficiaries,' and the trustee is directed to pay over to defendant Frances W. Budlong all of the net income of the trust for her benefit and to pay over to each principal beneficiary who was a son of the decedent all of the net income of the trust for his benefit. These provisions of the 1929 trust, however, were made subject to certain protective provisions, so called, set out in the second clause of the indenture as follows:    provided that if any of said principal beneficiaries shall assign, encumber or purport to assign or encumber his or her beneficial interest in the trust established for his or her benefit, or if any creditor of either of them shall attempt to reach such beneficial interest by legal process, or in case of the bankruptcy of any of them, his or her respective right to receive such net income in accordance with the foregoing shall thereupon cease and said trustee shall thereafter pay over to and/or expend for his or her benefit, as the case may be, such part (or all) of the net income of the trust for his or her respective benefit as in each case said trustee in his discretion shall from time to time deem advisable. In Rhode Island we have long followed the minority rule that a spendthrift trust, so called, is invalid. A spendthrift trust is one in which, by direction of the settlor, the right of the beneficiary to payments from the trust fund or the income thereof is not transferable by him nor liable to be taken from him for satisfaction of his debts. Bogert Trusts and Trustees (2d ed.), § 221, at 623. In 1858 in Tillinghast v. Bradford, 5 R.I. 205, this court, speaking through Chief Justice Ames, held that a trust containing a spendthrift clause was invalid unless it contained provisions for a gift over. The Chief Justice therein said that restraints on alienability are so opposed to the nature of property and immunity from liability for payment of debts is so opposed    to the honest policy of the law,  as to be totally void, unless, indeed, which is not the case here, in the event of its being attempted to be aliened, or seized for debts, it is given over by the testator to some one else. 5 R.I. at 212. In Smyth, for an Opinion, 49 R.I. 27, some seventy years later, this court clearly reaffirmed the position taken in Tillinghast. In express terms it gave approval to the rule prevailing in England and followed in most of the jurisdictions of this country. While under that rule the spendthrift provisions in a trust are invalid, such a trust can be saved by converting it into a discertionary trust, so called. The court said: The courts of this State have consistently followed the English rule and held spendthrift trusts invalid when, as in this case, upon a breach of the conditions named in the trust instrument there is no forfeiture, no limitation over, no condition of cessor and no discretion in the trustee as to the payment of the income to the cestui que trust. 49 R.I. at 31, 139 A. at 659. In that opinion this court stated that the English rule is that a vested equitable estate for life is alienable and liable for the debts of the beneficiary notwithstanding that there is an express provision in the trust instrument to the contrary, and that a clause prohibiting alienation or the taking for the debts of the beneficiary is totally void unless    the trust instrument provides, in the event of an attempt to alienate or seize for debts, for a cessation of the equitable estate, or gives the income over to someone else. 49 R.I. at 30, 139 A. at 659. The question with which we are confronted here is whether the 1929 trust, which gave to Frances an equitable life estate in the income thereof, provided that if she were to assign or encumber her beneficial interest in the trust, or if any creditor were to attempt to reach such beneficial interest by legal process, her respective right to receive such net income in accordance with the provisions of the trust    shall thereupon cease and said trustee shall thereafter pay over to and/or expend for his or here benefit, as the case ay be, such part (or all) of the net income of the trust for his or her respective benefit as in each case said trustee in his discretion shall from time to time deem advisable. We must now decide whether the protective provisions of this trust, upon becoming operative, would create a discretionary trust as contemplated by the English rule. In Tillinghast the court held simply that the spendthrift provision was totally void unless, in the event of an attempt to alienate or seize for debts, it is given over by the testator to some one else. In Smyth the court simply referred to the English rule and held that such spendthrift clauses in a trust are invalid where, upon a breach of the condition named in the instrument,    there is no limitation over, no condition of cessor and no discretion in the trustee as to the payment of the income to the cestui que trust. 49 R.I. at 31. It is to be conceded that the language used by this court in Smyth is ambiguous, particularly the phrase    no discretion in the trustee as to the payment of the income to the cestui que trust. From the context in which this language was used, it would appear that the court intended to say that the spendthrift clause in a trust is invalid if inter alia the trustee is without discretion to do other than to pay the income to the original cestui que trust. However, there appears to be a common thought running through these cases. In each instance the court contemplated that the preservation of the validity of the spendthrift clause could be accomplished if upon the breach of the conditions set forth in that clause there came into being a subsequent discretionary trust whose terms conferred upon the trustee a broad discretion concerning the makings of payments. As we understand the court, the discretion must include the right to pay over the income, in part at least, to or for the use of some person or persons in addition to the original beneficiary. As one leading text writer has noted, in the case of a discretionary trust where the trustee's discretion is so limited that he must pay all or a particular part of the income to the beneficiary and may use his judgment about the time or manner of such payment only, the creditors of the beneficiary can compel the trustee to pay the beneficiary's share of the income to them. Bogert, Trusts and Trustees (2d ed.), § 221, at 626. It is our intention to take a more liberal stand on the subject of trusts which include spendthrift provisions. We seek to accomplish this not so much by attempting to find support in the language of Smyth, wherein it is questionable that the court, despite the language used, followed the English rule as it had by then developed. Rather, we seek to state a rule in which we would embody what we conceive to be the philosophy of the modern English rule. In Duncan v. Elkins, 94 N.H. 13, 45 A.2d 297, that court, referring to such provisions, said: This last provision is for the modification of the trust into what is known as a `protective trust,' the modification being executed upon the happening of an event named in the instrument of settlement from one where the beneficiary has a property right to receive income to one where the sums received depend upon the discretion of the trustee. This form of trust was apparently invented in England, where the right of a beneficiary is alienable in such situations   . Id. at 16, 45 A.2d 299. Accepting the New Hampshire court's statement as to the thrust of the English rule, we propose its adoption in this state. To do so will involve the extension of a rule which until now has held spendthrift provisions totally void unless the trust instrument provided, in the event of a breach of its conditions, for a cessation of the equitable estate, or a subsequent gift of its income to someone else. In extending that rule we now hold that the subsequent gift may take the form of a discretionary trust provided its terms are sufficiently elastic to permit the trustee at his discretion to pay the income, not only to the original beneficiary, but to others as well. In our opinion, the 1929 trust was not converted into a discretionary trust by operation of the protective provisions thereof. It remains a spendthrift trust, and under our settled rule the spendthrift provisions thereof are void, and the income is subject to transfer by the beneficiary and is reachable by his creditors. An examination of the trust provisions discloses that the discretion conferred upon the trustee is insufficient to meet the essential requirement of a discretionary trust, that is, that, upon the happening of the condition prescribed therein, the trustee must be vested with a discretion sufficiently wide to permit him to make payments to parties other than the beneficiary. Unlike the testamentary trust here involved, it fails to give the trustee discretion to pay the income, either in whole or in part, to or for the beneficiary or to or for the benefit of his family.