Story Case

Mrs. Adam Reed of Worcester, Massachusetts, owned a rich estate in the Berkshire Hills, which she desired to have pass to her son Percival. The son, however, was a dissolute, careless fellow, and the mother knew that the property would not long remain in his hands were he given entire control. Upon consultation with a lawyer, it was decided that the estate should be given to Mr. Loas, an old and trusted friend. Mr. Loas was to hold the property in trust, and pay Percival the income in quarterly payments. The document provided that the income should "not be anticipated by assignment," which meant that Percival was not to have the right to give away or spend the income, before it was due. After this arrangement was completed, Percival contracted debts with various dealers in Worcester, agreeing in each case to pay his creditors out of the next quarterly installment of his income. Mr. Loas, the trustee, on June first, paid Percival $10,000, which the latter deposited in the bank in his own name. He refused to pay the creditors, who now seek to reach the $10,000 through court proceedings. Percival claims this $10,000 cannot be taken by any creditor by terms of the document made by his mother.

Is this a good defense?

Ruling Court Case. Broadway National Bank Vs. Adams, Volume 133, Massachusetts, Page 170

Adams' brother, by will, at his death, gave $75,000 to his executor in trust. By his will, he directed that this money should be invested in such a manner as the executor chose. It was further provided that the income from this money should be paid to Charles Adams, the defendant herein, "free from the interference or control of his creditors, my intention being that the use of said income shall not be anticipated by assignment." Charles Adams became deeply indebted to the Broadway National Bank, and the bank brings this bill to reach and apply in payment of this debt on the income due Charles from the estate of his deceased brother.

It was contended by the bank that such a restraint placed upon a gift of money was in fraud of creditors, contrary to public policy, and therefore void.

Mr. Chief Justice Morton said: "Whether a man can settle his own property in trust for his own benefit, so as to exempt the income from alienation by him on attachment in advance by his creditors, is a different question which we are not called upon to consider in this case. But we are of the opinion that any other person having the entire right to dispose of his property may settle it in trust in favor of a beneficiary, and may provide that it shall not be alienated by him by anticipation, and shall not be subject to be seized by his creditors in advance of its payment to him. It follows that, under the provisions of the will which we are considering, the income of the trust fund created for the benefit of defendant, Adams, cannot be reached by attachment, either at law or in equity, before it is paid to him." Judgment was given for Adams.

Ruling Law. Story Case Answer

A testator, in America, may grant land in trust, and direct the trustees to pay the income therefrom to a designated person for life, without any power of assignment or alienation by the designated person. This is called a "Spendthrift Trust." It is called this, for the reason that the beneficiary of the trust receives the income as long as he lives, but is unable to sell it. Furthermore, it cannot be attached by his creditors for the payment of his debts. This is a restraint on alienation as designated from a forfeiture on alienation, as explained in the preceding case. The attitude of the courts in this country is not to regard such restraints on alienation in violation of sound public policy.

This method of devising or granting property secures to the beneficiary an income for life, but he has no control over the income until it comes into his actual possession. But, having come into his actual possession, as was true in the Story Case, it is available to creditors. As long as the $10,000 was under the control of Mr. Loas, no creditor could demand that it be paid to him instead of to Percival, but when the money once belonged to Percival, the terms of the document will no longer protect it, and even if the document was expressly designed to protect this income, even in Per-cival's hands, such design could not be given effect.