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Unless a valid restraint on alienation has been imposed in accordance with the rules stated in Restatement (Second) of Trusts §§ 152 and 153, if the trustee pays to or applies for the beneficiary any part of the income or principal with knowledge of the transfer or after he has been served with process in a proceeding by a creditor to reach it, he is liable to such transferee or creditor. Effect of payment by trustee to beneficiary after assignment. Although in the case of a discretionary trust a transferee or creditor of the beneficiary cannot compel the trustee to pay over any part of the trust property to him, yet if the trustee does pay over any part of the trust property to the beneficiary with knowledge that he has transferred his interest or after the trustee has been served with process in a proceeding by a creditor of the beneficiary to reach his interest, the trustee is personally liable to the transferee or creditor for the amount so paid, except so far as a valid provision for forfeiture for alienation or restraint on alienation has been imposed as stated in Restatement (Second) of Trusts §§ 150, 152, and 153.
Frank Gentry created a revocable Trust. During his lifetime, Frank was the beneficiary of the Trust. The residue of the Trust’s assets was to be divided into five equal shares. Article III, Section D.5. of the Trust provided that the fifth share shall remain in trust until the death of Isabell Gentry, and upon the latter’s death, the trust shall terminate and the balance of the trust and accumulated income shall be distributed to the then surviving beneficiaries in proportion to the beneficial interests they would have been entitled to. The lower courts characterized the Trust provisions applicable to Isabell Gentry as being discretionary in nature. Ron and Nancy Wilcox obtained a judgment against Isabell Gentry for fraud in the sale of a residential property. Their judgment was for $ 40,000 actual damages and $ 11,667.35 punitive damages. They garnished the Trust to seek satisfaction of their judgment. Frank Gentry, grantor and sole beneficiary during his lifetime, had died previously, thereby activating section 5(e) relative to Isabell. The district court held that any trustee payments directly to Isabell were subject to garnishment but that trustee payments for Isabell's benefit were not. The Court of Appeals affirmed.
If the trustee exercised its discretion and made a payment on behalf of the beneficiary, could such payment be subject to the creditors’ garnishment?
The court agreed that the case involved a discretionary trust and found that the trust contained no spendthrift provision. The court saw no valid reason for treating payments to a beneficiary differently from payments made on behalf of the beneficiary as far as creditors were concerned where, if the creditor had the right to reach payments made to the beneficiary, excluding payments made on behalf of the beneficiary served only to encourage circumvention of that right. Finding it determinative of the issue, the court adopted Restatement (Second) of Trusts § 155(2).