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The Trustee and the Spendthrift: The Argument against Small Trust Termination

48 Gonz. L. Rev. 163, 2012/13

23 Pages Posted: 16 Jan 2013 Last revised: 28 Oct 2014

Philip J. Ruce

Thomas Jefferson School of Law

Date Written: 2012

Abstract

Trusts can be the solution to a tremendously varied and diverse set of problems, including, significantly, asset protection. It is well established in American law that a settlor may render a trust inalienable by including a spendthrift provision within a trust document. This prevents a beneficiary from selling or otherwise transferring his interest in the trust, and also prevents creditors from attaching most claims to the trust assets. But even more importantly, it serves to underline the purpose of a spendthrift trust: to keep a beneficiary from readily depleting his windfall; that is, to save the beneficiary from himself.

With the demise of the rule against perpetuities, however, modifications and terminations of trusts have become more and more common. Though this can make trust planning more flexible (assets may remain in trust longer, and it gives beneficiaries and trustees the ability to make changes to the document if needed), it also has a more discouraging effect. Settlors can see their intentions frustrated, especially with regards to spendthrift beneficiaries.

Nowhere is this more evident than with the closure of small trusts. Small trust termination statutes give trustees flexibility in closing trusts that have become uneconomical to administer. But giving a spendthrift beneficiary access to a lump sum of $100,000 or even $50,000 (typical dollar amounts for small trust termination statutes) can be worrisome, and can frustrate the intentions of the settlor.

This paper will analyze the Uniform Trust Code, the Restatement of Law, relevant scholarship, and notable doctrines dealing with trust modification and termination; the paper concludes that a trustee owes to a spendthrift beneficiary a duty to continue to administer a trust until it reaches a zero balance or until it distributes under specific instructions provided by the settlor.

Keywords: trust, trustee, spendthrift, small trust, uneconomical, provision

JEL Classification: K10, K11, K22, K34, K40

Suggested Citation

Ruce, Philip J., The Trustee and the Spendthrift: The Argument against Small Trust Termination (2012). 48 Gonz. L. Rev. 163, 2012/13. Available at SSRN: https://ssrn.com/abstract=2201641

Philip J. Ruce (Contact Author)

Thomas Jefferson School of Law ( email )

1155 Island Ave
San Diego, CA 92101
United States

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