«IS THE DEAD HAND LOSING ITS GRIP IN TEXAS?: SPENDTHRIFT TRUSTS AND IN RE TOWNLEY BYPASS UNIFIED CREDIT TRUST N. Camille Varner* I. INTRODUCTION The ...»
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IS THE DEAD HAND LOSING ITS GRIP IN TEXAS?: SPENDTHRIFT
TRUSTS AND IN RE TOWNLEY BYPASS UNIFIED CREDIT TRUST
N. Camille Varner*
The classic phrase “dead-hand control” signifies the ability of an
individual to direct how and to whom his property will pass after his death.1 The extent to which the law should encourage or even protect this ability is an underlying issue in almost every legislative and judicial decision creating law on wills, trusts, and estates.2 Today we never think twice when someone devises their property in a will to a loved one or favored institution. It was their property to control when they were living, so why should they not be able to choose who receives it when they die? The maxim “Cujus est dare, ejus est disponere” (whoever has the right to give has the right to dispose of the same as he pleases)3 embodies the basic concept of the absolute authority of the property owner over his property.4 This logic appeals to the reasoning of even the least legally-inclined American, especially those on the receiving end of a testator’s bounty.
The idea of a trust—where property can be given to a capable person to manage for the benefit of another5—flows easily from the acceptance of a testator’s right to control his property’s final destination. The trust is an incredibly effective estate planning tool, adaptable to an endless number of family situations and economic goals. But when this adaptability and *Managing Executive Editor, Baylor Law Review; J.D., Baylor Law School, 2010; B.A.
Political Science, Rhodes College, 2007. The author would like to thank Professor Thomas Featherston from Baylor Law School for his guidance and support throughout the writing process.
Also, thank you to Keith Dollahite, J.D. for his practical insight and valuable research assistance.
See RONALD CHESTER, FROM HERE TO ETERNITY?: PROPERTY AND THE DEAD HAND 2(2007).
2 See CHESTER, supra note 1, at 2.
ERWIN N. GRISWOLD, SPENDTHRIFT TRUSTS: RESTRAINTS ON THE ALIENATION OF
EQUITABLE INTERESTS IMPOSED BY THE TERMS OF THE TRUST OR BY STATUTE 463 (1936)(citing Ashhurst v. Given, 5 Watts & Serg 323, 330 (Pa. 1843)).
4 Richard R. Powell, Freedom of Alienation—For Whom?: The Clash of Theories, 2 REAL PROP. PROB. & TR. J. 127, 127 (1967).
5 See BLACK’S LAW DICTIONARY 1647 (9th ed. 2009).
VARNER.WL (DO NOT DELETE) 8/9/2010 11:35 AM 2010] SPENDTHRIFT TRUSTS 599 effectiveness allow the dead hand to maintain too tight of a grip for too long, we begin to question just how much control we should allow from the grave.6 Envision this scenario: A man works hard all his life, pulling himself up by his bootstraps to rise to a comfortable lifestyle. He fathers a son—now a careless young man who never has known hardship but has lived comfortably off the fruits of his father’s labor. The father has amassed a small fortune that he wants to give to his son one day, but the father knows that the son, despite having reached adulthood, most likely would squander the money. Based on the concept of cujus est dare, the father, as owner of the money, should have the “freedom of alienation” of his property.7 In other words, the father should have unlimited freedom not only to choose who receives the gift but also to attach any strings to the gift that he wants.8 In this example, the father probably wants to ensure that the son uses the funds only for specific purposes and that any of the son’s current or future creditors cannot reach it. To achieve these goals, the father could establish a spendthrift trust with the son as the beneficiary.9 As we shall see, a spendthrift trust is basically a normal trust with a special provision or clause attached.10 The special provision, called a spendthrift provision, can prevent the son from either voluntarily or involuntarily parting with the money.11 The problem is that even if we embrace the cujus est dare concept that the father can do whatever he wants with his own money, the idea that the father could die and the son could have a large amount of wealth that creditors cannot touch and he can never transfer is still slightly uncomfortable.
This initial discomfort with spendthrift trusts is nothing new. The struggle over the alienability of property can be traced back to the English feudal system,12 and the modern American spendthrift trust reflects this deep-rooted friction. The spendthrift provision has become an advantageous supplement to the flexible trust device, enhancing the freedom and control of the settlor, even in death.13 In Texas and many
other states, spendthrift trusts are statutorily valid.14 Despite its codified enforceability, at the heart of the spendthrift trust lies a tangle of controversy on morality, economics, and politics. These conflicting elements continue to provoke doubts of the desirability of promoting control of the dead hand. At some point the balance between the rights of the dead and those of the living begins to tip in favor of those still capable of suffering consequences.
In In re Townley Bypass Unified Credit Trust, the Texarkana Court of Appeals considered a spendthrift trust beneficiary’s ability to devise a gift and in an analytically flawed opinion found the spendthrift provision unenforceable.15 The Texas Supreme Court has denied review of Townley, thus opening the door for further confusion over spendthrift protection in Texas. While the Townley fact situation is decidedly unique, the fundamental spendthrift trust issues raised by Townley present the perfect opportunity to examine current Texas spendthrift law and the direction in which it is headed. This Note surveys the history and purpose of spendthrift trusts both in Texas and nationwide and then compares these findings to In re Townley Bypass Unified Credit Trust.
II. HISTORY AND PURPOSE OF SPENDTHRIFT TRUSTS
A. What Is a Spendthrift Trust?
“Spendthrift trusts are probably the most commonly used protective trusts.”16 A spendthrift trust is a trust in which the ability of a beneficiary to transfer, assign, or alienate his rights to income or principal is restricted.17 As the term indicates, spendthrift trusts are valuable to settlors wishing to provide for a beneficiary while at the same time protecting the beneficiary from his own recklessness and frivolity.18 Although the phrase is useful in conveying the general idea behind spendthrift trusts, whether the
beneficiary is in fact a spendthrift is not important.19 The protection stems from interpretation of the trust instrument and is not limited to beneficiaries who are either legally incompetent or otherwise unable to responsibly manage their finances.20 This restraint on alienation can be accomplished by the settlor’s directions in the trust instrument, typically in the form of a spendthrift clause, or by statute.21 Many trusts contain such a spendthrift
The beneficiary of this trust is hereby restrained from anticipating, encumbering, alienating or in any other manner assigning or disposing of her interest in either principal or income of such trust estate and is without power to do so; nor shall such interest be subject to her liabilities or obligations or to judgment, garnishment or other legal process, or bankruptcy proceedings, or any claims of creditors or other parties.22 This particular provision indicates the settlor’s express intent to impose a restraint on alienation, but courts have also found a similar intention when little or nothing in the trust instrument expressly deals with the issue.23 Authorities conflict as to the validity and desirability of spendthrift trusts, and states differ in the extent of protection they allow a settlor to afford a beneficiary.24 As this Note will discuss later, these restraints are valid in all United States jurisdictions by court decision, statute, or both.25 19 3 AUSTIN WAKEMAN SCOTT ET AL., SCOTT AND ASCHER ON TRUSTS § 15.2 (5th ed. 2007);
Wicker, supra note 9, at 1.
20 RESTATEMENT (THIRD) OF TRUSTS § 58 cmt. a (2003).
21 SPERO, supra note 16, § 6.02; Wicker, supra note 9, at 1. See infra Part IV for citations to the statutes and cases authorizing spendthrift trusts by each state.
22 This particular spendthrift provision was recited in the facts of a Texas case. Dierschke v.
Cent. Nat’l Branch of First Nat’l Bank at Lubbock, 876 S.W.2d 377, 380 (Tex. App.—Austin 1994, no writ) (emphasis removed).
23 3 SCOTT ET AL., supra note 19, § 15.2.4 (citing Eaton v. Boston Safe Deposit & Trust Co., 240 U.S. 427 (1916); RESTATEMENT (SECOND) OF TRUSTS § 152 cmt. e, illus. 6 (1959)).
Although beyond the scope of this Note, the finding of presumed intent to restrain alienation is a complex and interesting topic. For further reading, see 3 SCOTT ET AL., supra note 19, §§ 15.2.4,.3–.4.
24 3 SCOTT ET AL., supra note 19, § 15.2.
25 Id.; SPERO, supra note 16, § 6.02.
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Today, nearly all professionally-prepared trust instruments contain a spendthrift clause.26 B. Origin of Spendthrift Trusts Spendthrift trusts are relative newcomers to the American legal lexicon, but they are a modern phase of the struggle over the alienability of property that has existed in English law for centuries.27 According to an anecdotal history by Professor Richard R. Powell, the origin of the ability of donors to restrict the control of the donee can be traced to the common beliefs of wealthy Englishmen in the eighteenth century.28 As fathers of beautiful, precious daughters, the Englishmen believed that the good-for-nothing men their daughters selected as husbands were wasteful scoundrels.29 The fathers, therefore, needed to provide for the security of their daughters and future grandchildren.30 The Englishmen further believed that this financial security needed to be protected from the improvidence of the spendthrift sons-in-law.31 These beliefs, combined with the fact that many of the Englishmen were also prominent lawyers and judges,32 contributed to the judicial evolution of one of the principal types of restraints on alienation of property: restraint on the alienation of the separate property of a married women.33 The law concerning this type of restraint was exceedingly complex, but the innovation was a device that allowed women to hold property and contained a clause that prevented them from being coerced by their husbands to alienate that interest.34 The result was the earliest situation in which
restraints on the alienation of equitable interests were upheld.35 This particular restraint on alienation is largely obsolete, but the concept is similar to the more modern and prominent American law of spendthrift trusts.36 The greatest single factor in the development of spendthrift trusts in the United States was undoubtedly the dictum of Justice Miller in the 1875 United States Supreme Court case Nichols v. Eaton.37 Although cited in countless subsequent cases upholding spendthrift trusts, the case itself actually did not involve the validity of a spendthrift trust.38 In Nichols, a testator left her estate in trust for the benefit of her sons, but provided that if the sons should alienate the income or otherwise become bankrupt or insolvent, the income could become payable to another person at the discretion of the trustees.39 One son did, in fact, become bankrupt,40 and the Court held that the son’s assignee in bankruptcy was not entitled to anything.41 Speaking for the Court, Justice Miller seized the opportunity to explore the subject of dead-hand control in depth and recognized the validity of spendthrift trusts.42 Miller never used the term “spendthrift
trust,” but he addressed the concept in widely cited dictum:
Nor do we see any reason, in the recognized nature and tenure of property and its transfer by will, why a testator who gives, who gives without any pecuniary return, who gets nothing of property value from the donee, may not attach to that gift the incident of continued use, of uninterrupted benefit of the gift, during the life of the donee. Why a parent, or one who loves another, and wishes to use his own property in securing the object of his affection, as far as property can do it, from the ills of life, the vicissitudes of fortune, and even his own improvidence, or incapacity for self-protection, should not be permitted to
do so, is not readily perceived.43 Miller reasoned that creditors are neither misled nor defrauded when such restraints are upheld because all wills and instruments creating such trusts are a matter of public record.44 To compel trustees to continue to pay income to a son after bankruptcy or to his assignee, Miller wrote, was to make a will for the testator that she never had made. The Court refused to assume this task.45 Nichols received wide circulation and was soon cited and followed in many states.46 But if restraints on alienation were such a novel idea in American jurisprudence and Miller’s words were merely dictum, how did this radical concept spread so quickly? Erwin Griswold, whose 1936 book Spendthrift Trusts is still cited as an essential authority on the subject,
attributed the popularity of Miller’s philosophy to contemporary thinking: