Tennessee § 35-15-502 - Spendthrift provision.

§ 35-15-502. Spendthrift provision.

A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary's interest. A term of a trust providing that the interest of a beneficiary is held subject to a “spendthrift trust,” or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary's interest. A spendthrift provision applies to all beneficial interests, including distribution interests and remainder interests. A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and a creditor or assignee of the beneficiary may not reach any of, the interest, or a present, future or prospective distribution at the trust level. Similarly, no creditor or assignee of the beneficiary may force any distribution from the trust. This subsection (d) remains applicable regardless of the beneficiary's potential right to force a distribution under § 35-15-814. Notwithstanding any other provision of this section to the contrary, regardless of whether a beneficiary has any outstanding creditor, a trustee, cotrustee or other fiduciary of a trust subject to a spendthrift provision may directly pay any expense on behalf of such beneficiary and may exhaust the income and principal of the trust for the benefit of such beneficiary. No trustee, cotrustee or other fiduciary is liable to any creditor for paying the expenses of a beneficiary under a trust subject to a spendthrift provision. This subsection (e) remains applicable regardless of whether the beneficiary for whom such direct payment was made held a mandatory, support, discretionary or remainder interest. Acts 2004, ch. 537, § 41; 2013, ch. 390, § 16. Compiler's Notes. Acts 2013, ch. 390, § 55 provided that: (b) Except as otherwise provided in the act, on July 1, 2013: The act applies to all trusts created before, on, or after July 1, 2013; The act applies to all judicial proceedings concerning trusts commenced on or after July 1, 2013; The act applies to judicial proceedings concerning trusts commenced before July 1, 2013, unless the court finds that application of a particular provision of the act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of the act does not apply and the superseded law applies; Any rule of construction or presumption provided in the act applies to trust instruments executed before July 1, 2013, unless there is a clear and express indication of a contrary intent in the terms of the trust; and An act done before July 1, 2013, is not affected by the act. Textbooks. Tennessee Jurisprudence. 12 Tenn. Juris., Executions, § 56; 22 Tenn. Juris., Spendthrift Trusts, § 1. 1. Validity. Appellate court construed trust as restraining the voluntary and involuntary transfer of farm property itself, but also as allowing a beneficiary to voluntarily transfer a year's worth of income from the property; thus, that portion of the spendthrift provision pertaining to voluntary alienation of farm income was invalid, and debtor's interest in that income was subject to execution. Atkins v. Marks, 288 S.W.3d 356, 2008 Tenn. App. LEXIS 349 (Tenn. Ct. App. June 11, 2008), rehearing denied, 288 S.W.3d 356, 2008 Tenn. App. LEXIS 449 (Tenn. Ct. App. July 15, 2008). Section Comment. Unless provided otherwise hereinafter, any reference to “section,” “subsection” or “subdivision” means all, or such portion of, T.C.A. § 35-15-502 . This section addresses the effects of a spendthrift provision as such is defined in T.C.A. § 35-15-103 , on any type of trust and on any type of beneficial interest under such trust. The provisions of this section in some ways diverge significantly from the Uniform Trust Code and the restatements. To the extent this section is in conflict with the Uniform Trust Code, any restatement or any other foreign law, such foreign law is not precedential or controlling and is rejected by the Tennessee Uniform Trust Code. Spendthrift provisions and the effects thereof are also discussed in other places throughout the Tennessee Uniform Trust Code and its comments. Two notable places a reader is directed are; the section comments related to the term “spendthrift provision” in T.C.A. § 35-15-103 ; and the comments under the heading “Part 5. Creditor’s Claims; Spend-thrift and Discretionary Trusts.” in T.C.A. § 35-15-101 . Subsection (a) provides that for a spendthrift provision to be effective under the Tennessee Uniform Trust Code, it must prohibit both the voluntary and involuntary transfer of the beneficiary’s interest. That is to say, a settlor may not allow a beneficiary to assign while prohibiting a beneficiary’s creditor from collecting, and vice versa. See Restatement (Third) of Trusts § 58 cmt. b (Tentative Draft No. 2, approved 1999). See also Restatement (Second) of Trusts § 152(2) (1959). A spendthrift provision valid under the Tennessee Uniform Trust Code will also be recognized as valid in a federal bankruptcy proceeding. See 11 U.S.C. § 541 (c)(2). Subsection (b) allows a settlor to provide maximum spendthrift protection simply by stating in the instrument that all interests are held subject to a “spendthrift trust” or words of similar effect. Subsection (c) provides that a settlor has the power to restrain the transfer of a beneficiary’s interest, regardless of whether the beneficiary has a beneficial interest in income, in principal, or in both and regardless of whether such interest is or derives from any type of distribution interest (mandatory, support or discretionary) or is a remainder interest. A creditor of the beneficiary is prohibited from attaching a protected interest and may only attempt to collect directly from the beneficiary after payment is made. Subsection (d) provides that a spendthrift provision blocks any creditor or assignee (hereinafter in the comments to this section, individually and collectively, simply “creditor”) of a beneficiary from reaching any interest of such beneficiary, as well as any present, future or prospective distribution at the trust level. Likewise, no creditor can force any distribution from the trust. This remains true despite the fact that a beneficiary under mandatory and support interests may potentially force a distribution under T.C.A. § 35-15-814 . Subsection (e) provides that the existence of any creditor of any beneficiary of a trust with a spendthrift provision in no way impacts any trustee’s, cotrustee’s or other fiduciary’s (hereinafter in the comments to this section, individually and collectively, simply “fiduciary”) right or ability to directly pay any expense on behalf of such beneficiary; and such fiduciary may exhaust a trust for the benefit of such beneficiary. In other words a fiduciary need not make a distribution from a trust subject to a spendthrift provision directly to a beneficiary. Instead such fiduciary has the power to directly pay to a third party any expense for the benefit of such beneficiary and no creditor may reach such payment. If a fiduciary makes such a direct payment, it is not possible for such fiduciary to incur liability to any creditor for so doing. This remains true regardless of the beneficiary for which such payment was made held a mandatory, support, discretionary or remainder interest. A disclaimer, because it is a refusal to accept ownership of an interest and not a transfer of an interest already owned, is not affected by the presence or absence of a spendthrift provision. Most disclaimer statutes expressly provide that the validity of a disclaimer is not affected by a spendthrift protection. See, e.g ., Uniform Probate Code § 2-801(a). Releases and exercises of powers of appointment are also not affected because they are not transfers of property. See Restatement (Third) of Trusts § 58 cmt. c (Tentative Draft No. 2, approved 1999). Except as otherwise provided in T.C.A. § 35-15-505 , a spendthrift provision is ineffective against a beneficial interest retained by a settlor up to the maximum amount that can be distributed to or for such settlor’s benefit. A valid spendthrift provision makes it impossible for a beneficiary to make a legally binding assignment or transfer, but the appropriate fiduciary may voluntarily choose to honor such beneficiary’s purported assignment or transfer, such being in reality a revocable direction or request to the trustee to pay amounts otherwise distributable to the beneficiary to the purported assignee. Note that under the immediately preceding sentence a beneficiary’s purported assignment relative to a discretionary interest may have little if any practical effect. That is because the amounts “otherwise distributable to the beneficiary” are subject to the trustee’s discretion. An appropriate fiduciary is protected, and is under no liability for, honoring such beneficiary’s request, but must cease doing so upon instruction from such beneficiary. Should an appropriate fiduciary decide to honor such beneficiary’s request, such fiduciary can decide to cease to so honor it and may recommence distributions to the beneficiary at anytime. Moreover, because the beneficiary has not made a binding transfer, such beneficiary can withdraw the beneficiary’s direction but only as to future payments. See Restatement (Third) of Trusts § 58 cmt. d (Tentative Draft No. 2, approved 1999); Restatement (Second) of Trusts § 152 cmt. i (1959), but the extent such restatements are in conflict with this paragraph, this paragraph and the Tennessee Uniform Trust Code controls. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before July 1, 2013, that statute continues to apply to the right even if it has been repealed or superseded.