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By: Scott Grossman on July 17th, 2017

4 Scenarios Where a Trustee Has an Obligation to a Creditor

After your loved one dies, you may be in the process of administering their trust when you are suddenly approached by the creditor of a beneficiary. If the trust is a spendthrift trust, it is possible that you have no obligation to make any payment of a beneficiary’s share to his or her creditor. However, there are exceptions to this general rule. There are some cases where the trustee will have no obligation to make any payment to the creditor. Yet, there are circumstances where the creditor protector provisions of the trust will fail.

Four Situations Where a Trustee of a Spendthrift Trust May Be Liable to Creditors:

  1. When the spendthrift trusts sole purpose is to hinder creditors of the beneficiary or the creator of the trust.
  2. The spendthrift trust is only serving to intentionally delay creditors of the beneficiary or the creator of the trust.
  3. If the spendthrift trusts’ purpose is to defraud creditors by making a fraudulent transfer of the assets into the trust.
  4. The creator of the trust filed for bankruptcy within one year of forming and funding the spendthrift trust.

A trustee of a spendthrift trust should exercise caution before complying with or denying a creditor’s claim during a trust administration. If the trustee unnecessarily pays a creditors claims, the beneficiary could potentially take action against the trustee. If the creditor claim is not paid, and the denial was unjustified, the trust may find itself caught up in costly and time-consuming litigation. To learn more about the creditor claim process during a trust or probate administration, view our article, “11 Facts About Creditor Claims and Riverside Probate Administration.”

Trustees of spendthrift trusts are often inexperienced and in need of guidance. We encourage you to share this article with your contacts on Google+! The information it contains may be helpful to a friend or a loved one during a trust administration.

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