August 1st, 2012
It’s been a while since we last looked at spendthrift clauses in trusts. If drafted correctly, they can be an effective tool for shielding assets. Of course, if a beneficiary knows he or she is an actual or contingent remainder beneficiary of a trust, then it usually helps for that beneficiary to actually know whether a spendthrift clause exists.
In Estate of Hord, the Court of Appeals of Iowa had occasion to consider the enforceability and scope of the spendthrift clause in Carl Hord’s will. Let’s take a look at what the clause said:
No interest, under this Article, shall be transferable, assignable, or become subject to any encumbrances by any beneficiary, nor shall such interest be subject to the claims of any creditors of any beneficiary prior to the actual distribution by the Trustees to the beneficiary.
Now, the background: Carl and Lois Hord were husband and wife and owned farmland. Carl executed a will, which created a trust, the sole property of which was Carl’s undivided one-half interest in the farmland. Lois received a life estate in the farmland and the remainder was divided between the couple’s nieces and nephews.
Lois, like a lot of beneficiaries, didn’t like the limitations the trust placed on her. So, Lois, through her attorney, asked the nieces and nephews to relinquish their interest in the trust in exchange for Lois paying the inheritance taxes. None of the remainder beneficiaries consulted an attorney and none actually received or reviewed a copy of Carl’s will. Their understanding of what they inherited varied, but each believed they inherited something of value. Five of the six remainder beneficiaries executed quitclaim deeds to Lois, which she recorded.
The remainder beneficiaries eventually obtained copies of Carl’s will, and they then learned of the spendthrift clause. Based on the clause, they believed their transfers to Lois were void. The Iowa appellate court agreed.
There was no dispute that a spendthrift clause was established in Carl’s will. The question was whether the remainder beneficiaries of the trust could assign their interest in the trust despite the spendthrift clause, or whether the assignment was prohibited per the terms of the spendthrift clause and invalid under Iowa law.
Although Iowa law recognizes several exceptions to spendthrift provisions, no exception applied in this case. The court concluded that the spendthrift clause in Carl’s will clearly and unequivocally prohibited any assignment or transfer by the remainder beneficiaries of their right to future payment from the trust. Thus, the transfers to Lois were invalid under Iowa law.