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State St. Bank & Tr. Co. v. Reiser - 7 Mass. App. Ct. 633, 389 N.E.2d 768 (1979)

Rule:

Where a person places property in trust and reserves the right to amend and revoke, or to direct disposition of principal and income, the settlor's creditors may, following the death of the settlor, reach in satisfaction of the settlor's debts to them, to the extent not satisfied by the settlor's estate, those assets owned by the trust over which the settlor had such control at the time of his death as would have enabled the settlor to use the trust assets for his own benefit. Assets which pour over into such a trust as a consequence of the settlor's death or after the settlor's death, over which the settlor did not have control during his life, are not subject to the reach of creditors since, as to those assets, the equitable principles do not apply which place assets subject to creditors' disposal.

Facts:

Wilfred A. Dunnebier created an inter vivos trust on September 30, 1971, with power to amend or revoke the trust and the right during his lifetime to direct the disposition of principal and income. He conveyed to the trust the capital stock of five closely-held corporations. Immediately following execution of this trust, Dunnebier executed a will under which he left his residuary estate to the trust he had established. About 13 months later Dunnebier applied to the State Street Bank and Trust Company (Bank) for a $75,000 working capital loan, which the Bank granted. Approximately four months after he borrowed this money, Dunnebier died in an accident. His estate has insufficient assets to pay the entire indebtedness due the bank. The Bank commenced an action in the Probate Court seeking to reach the assets of the inter vivos trust in order to pay the debt owed by the estate of Dunnebier. The Probate Court found that Dunnebier’s act of transferring the majority of his assets to an inter vivos trust prior to the grant of the loan was done without fraudulent intent. The Bank sought appellate review.

Issue:

Could a Bank reach the assets of the inter vivos trust in order to settle the debt owed by the estate of the Settlor?

Answer:

Yes.

Conclusion:

The Court held that in creating the trust, the settlor Dunnebier retained the power to amend or revoke and the right to direct the disposition of principal and income. According to the Court, where a person placed property in trust and reserved the right to amend and revoke, or to direct disposition of principal and income, the settlor's creditors may, following the death of the settlor, reach in satisfaction of the settlor's debts to them, to the extent not satisfied by the settlor's estate, those assets owned by the trust over which the settlor had such control at the time of his death as would have enabled the settlor to use the trust assets for his own benefit. As such, the Bank could reach the trust assets to pay Dunnebier’s debts after death to the extent that Dunnebier’s estate was insufficient to satisfy such debts. However, the Bank's access to trust assets was limited to those assets over which the settlor had retained control during the settlor's lifetime.

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