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Domestic US Trusts

Missouri Self Settled Trust

Over the last decade asset protection planning has become a crucial aspect of estate planning. Irrevocable trusts are one of the most useful tools for creditor protection planning.  This outline covers a broad array of topics applicable to the use of trusts for creditor protection, under Missouri law.  All of the techniques and strategies discussed in this outline are subject to the Missouri Uniform Fraudulent Transfer Act which is not otherwise discussed herein. See Mo. Rev. Stat. section 428.005, et seq.

The new Missouri Uniform Trust Code (hereafter the “Missouri Trust Code”) became effective on January 1, 2005 and is applicable to preexisting trusts. See Mo. Rev. Stat. section 456.11-1104 and 456.11-1106 .

Missouri Self Settled Trust Requirements

1.        The funding of the trust was not a fraudulent transfer pursuant to the Missouri Uniform Fraudulent Transfer Act,

2.        The grantor cannot have the ability to amend or revoke the trust,

3.        In addition to the grantor, there must be additional present or contingent beneficiaries of trust income and principal,

4.        The grantor/beneficiary’s interest in the trust must be completely discretionary,       and

5.       The trust contains a spendthrift provision.

The Missouri Trust Code provides for a Spendthrift Provision. 

Spendthrift Provision

The spendthrift provision determines by its language the protection from creditors

by providing that the interest of a beneficiary is held subject to a “spendthrift trust”, or words of similar import. Mo. Rev. Stat. section 456.5-502.2.

Voluntary vs. Involuntary Restraints

Mo. Rev. Stat. section 456.5-502.1.  In Missouri, the spendthrift provision is valid if it restrains either the voluntary or involuntary transfer (or both) of the beneficiary’s interest. 

*In most states the spendthrift provision must restrain the voluntary and involuntary transfer of the beneficiary’s interest. See section 502 of the Uniform Trust Code.   

Therefore, in Missouri the settlor may provide that a beneficiary may assign, gift, sell, commute, or transfer the beneficiary’s interest in the trust without limiting the asset protection benefits of the trust, as long as the involuntary transfer of the beneficiary’s interest is prohibited. 

            *However, without a spendthrift restraint, a beneficiary can always accelerate or anticipate his interest by sale, notwithstanding the settlor’s purpose to postpone enjoyment or withhold management.  This may be contrary to the settlor’s intent. There are a few estate/gift tax techniques that can only be implemented if the beneficiary can assign his interest in the trust.

Powers of Appointment and Disclaimers

Spendthrift clauses should always be drafted to exclude from their scope any exercise of a power of appointment or disclaimer. 

Creditor Remedies if No Spendthrift Provision

Without a spendthrift provision in a trust an assignee or judgment creditor of the beneficiary may with or without court order pierce the trust and reach the beneficiaries interest and future distributions, Mo. Rev. Stat. section 456.5-501.  However, the court may limit a creditor’s award to such relief, as is appropriate under the circumstances.  Id.

Mo. Rev. Stat. sections 359.421 and 359.411 states with regard for the limited partnership charging order; a creditor may not reach the underlying assets of the trust, as the beneficiary has no rights to these assets. Similar to the charging order remedy concerning a limited partnership, a creditor of a beneficiary may attach the right to future distributions from the trust, but may not attach the underlying assets of the trust.   

Although the creditor cannot force a distribution to the beneficiary, after the interest of the beneficiary has been attached, if the Trustee decides to make a distribution to, or for the benefit of, the beneficiary, then the distribution must be made directly to the creditor, rather than to the beneficiary.   

A creditor may reach a mandatory distribution of income or principal, if not made within a reasonable time after the required distribution date.  Mo. Rev. Stat. section 456.5-506.  Distributions described in terms of the beneficiary’s best interests, health, support, maintenance, education, or welfare are subject to a Trustee’s discretion.  A beneficiary’s interest in a GRAT, CRT, or unitrust is a mandatory distribution. An all income requirement and an outright distribution upon termination of a trust (whether upon another beneficiary’s death or any other triggering event) are also mandatory distributions.  Note that the term “mandatory distribution” is not defined in the Missouri Trust Code.

If the beneficiary is not a current permissible distributee, then the beneficiary’s interest may be too remote or contingent for the creditor to reach.

Section 456.5-501 states that a creditor may also reach the beneficiary’s interest “by other means”. This may mean that the creditor can force a judicial sale of the beneficiary’s interest in the trust. See Uniform Trust Code Comment to section 501. If a buyer can be found, a sale of the beneficiary’s interest may allow the creditor to reduce the judgment to cash much faster than waiting for distributions to be made. Typically no discretionary distributions will be made after the beneficiary’s interest is attached.

General Rule for Creditor Remedies

Mo. Rev. Stat. section 456.5-502, “if a trust contains a valid spendthrift restraint on involuntary transfers, then a creditor “may not reach the interest or a distribution by the Trustee before its receipt by the beneficiary.”  This means that a creditor cannot force a Trustee to make a distribution directly to the creditor and the creditor cannot force a judicial sale of the beneficiary’s interest in the trust.

A spendthrift provision is unenforceable against a claim of the state of Missouri or the United States to the extent a statute of Missouri or federal law so provides, Mo. Rev. Stat. section 456.5-503.3.

Exceptions are that a beneficiary’s child, spouse or former spouse with a judgment against the beneficiary may attach present and future rights to income from the trust.  The beneficiary is protected to the extent that the family creditor cannot seek the principal of the trust.

            *Missouri trusts may be pierced by federal taxes, services to the beneficiary based on health, maintenance and education, family support and marital property acquired during a marriage.

Bankruptcy

A beneficiary’s interest in the spendthrift trust will not become part of the bankruptcy estate, 11 U.S.C. § 541(c)(2) providing the spendthrift is valid under state law.