FOR THE NORTHERN DISTRICT OF CALIFORNIA
DOUGLAS and MARCI LYNN No. 1-87-00185
CHARLES DUCK, Trustee,
v. A.P. No. 1-88-0077
DOUGLAS and MARCI LYNN
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
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
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
"... 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 ___________________