Memorandum of Decision Re: Spendthrift Trust

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re DOUGLAS and MARCI LYNN                                       No. 1-87-00185 THOMPSON,      Debtors. ___________________________/ CHARLES DUCK, Trustee,      Plaintiff,    v.                                                                                    A.P. No. 1-88-0077 DOUGLAS and MARCI LYNN THOMPSON,      Defendants. ______________________________/
Memorandum of Decision
     The debtors filed a Chapter 7 petition on February 2, 1987. At that time, debtor Marci Lynn Thompson was one of three beneficiaries under a testamentary trust established by her grandmother under Minnesota law. The trust gives its trustee the power to use trust income in a discretionary manner for the education, maintenance and support of the beneficiaries, and further gives the trustee discretionary power to dip into principal for educational purposes or any purposes after the beneficiary has reached age 22. However, the trust mandates payment to each beneficiary of certain percentages of his or her share of the trust on his or her 21st, 25th, and 30th birthdays. The trust contains no spendthrift language. The issue raised by this adversary proceeding is whether any portion of the trust is property of the bankruptcy estate pursuant to section 541(c)(2) of the Bankruptcy Code.      The issue presented here is whether, under Minnesota law, the debtor could have lawfully assigned any of her interest in the trust on the day she filed her bankruptcy petition. To the extent she could have validly assigned anything, that interest was reachable by her creditors and hence becomes property of the bankruptcy estate.      The debtor has somewhat mischaracterized the nature of the trust. She argues that the trustee is given sole discretion to determine whether any distributions shall be made, but this is simply not so. While there is no guarantee that any of a beneficiary's share will be left on his or 21st, 25th, and 30th birthdays, the trust mandates that a percentage of anything in the trust on those birthdays be paid over, and the beneficiary would have the right to compel such payments. Even though the rights to receive such payments may be uncertain future interests, they are nonetheless freely transferable. 90 C.J.S., Trusts, section 193; In re LaBelle's Trust (1974) 302 Minn. 98, 223 N.W.2d 400.      Moreover, the debtor has misstated the law applicable here. She cites Scott on Trusts for the proposition that it is the character of the beneficiary's interest, rather than the the settlor's intent, which prevents creditors (and hence the bankruptcy trustee) from reaching the trust assets. While this may be the general rule, the law in Minnesota is the opposite.      If California law were applicable to this case, its resolution would be easy. There is no spendthrift language in the trust, so under California law the rights thereunder would be freely alienable. 60 Cal.Jur.3d, Trusts, section 90. Therefore, under California law all of the debtor's rights under the trust would belong to the bankruptcy estate; while the bankruptcy trustee could not compel any discretionary distributions, any that were made and the nondiscretionary distributions on the 21st, 25th and 30th birthdays of the debtor would belong to the bankruptcy estate.      However, Minnesota law is very unusual. In that state, there does not need to be any spendthrift language in the trust to prevent alienation by a beneficiary; if an intent to restrain alienation is inferable from the trust document as a whole, and spendthrift provisions are common to such trusts, then the beneficiary's interest is inalienable (and hence, not reachable by creditors or the bankruptcy trustee) even though there is no spendthrift language in the trust. In re Estate of Moulton (1951) 233 Minn. 286, 46 N..2d 667. While this rule has been severely criticized (see Bunn, "Spendthrift Trusts in Minnesota" 18 Minn.L.Rev. 493, 501), it is nonetheless the governing law in this case. One authority has summarized Minnesota law as follows:
       "... the Minnesota court has upheld spendthrift trusts        in a wholehearted fashion, holding that the interest        of the beneficiary of a trust ... was wholly free        from the claims of creditors, although the trust        instrument imposed no express restraint on alienation.         ... These decisions not only establish spendthrift        trusts in Minnesota, but they apparently make every        trust a spendthrift trust."        Griswold, Spendthrift Trusts (2nd Ed.), p. 195.
     Applying Minnesota law, it is clear that the debtor's grandmother intended that the trust be used for the support and education of her grandchildren, and that they accordingly not be permitted to squander their inheritance by alienation. Spendthrift provisions are common to this type of trust. This court cannot require express spendthrift language where Minnesota law did not require it when the trust was created. Accordingly, a spendthrift provision must be inferred and the debtor is therefore entitled to summary judgment in her favor.      Counsel for the debtor shall submit an appropriate form of judgment.
Dated: January 25, 1989                                                                              ___________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy