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A Better Partnership
December 19, 2013

COA holds that a trust's spendthrift provision did not prevent a beneficiary from gifting his interest in the trust upon his death

In in re Estate of Theodora Nickels Herbert Trust, the Court of Appeals affirmed the trial court’s interpretation of a trust agreement.  The parties disputed whether the trust agreement allowed a settlor’s child to name a successor to his interest in the trust upon his death.  The trust agreement stated that the trust for the settlor’s children would become inoperative “in the event any of the settlor’s children die before said trust estate or any part thereof is delivered over to him or her as provided in the trust.”  The Court found that this contingency did not apply because the settlor’s child had received annual income distributions before his death.  Accordingly, the trust did not become inoperative and the settlor’s child’s interest in the trust passed according to his will.  The Court also found that the settlor’s child had a vested right in the trust that could be devised under Michigan law, because the interest was reducible to a “sum in gross” and was not a life-estate interest, which would have required a power of appointment.  Last, the Court held that the spendthrift provision did not prevent the settlor’s child from gifting his interest upon his death because the gift was not a “conveyance, transfer, assignment or pledge as security for a debt.”  The Court reasoned that there is not reason to protect a trust from a beneficiary’s spendthrift habits after he or she is deceased.

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