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FAMILY LAW 30: Discretionary trust assets cannot be reached to satisfy claims for child support and alimony.
This action arises out of petitioner’s attempts to obtain compensation for child support and alimony arrearages owed to her by her ex-husband. Ex-husband is a beneficiary of the trust at issue herein. Petitioner sought to compel respondents, who are the trust’s successor co-trustees, to make income distribution payments to Ex-husband, out of which petitioner could then seek payment of Ex-husband’s child support and alimony arrearages.
Petitioner argues that the probate court erred by denying her petition for distribution based on a finding that the trust is a purely discretionary trust, and that she is not entitled to compensation for Ex-husband’s outstanding child support and alimony arrearages out of income distributions made to Ex-husband from the trust.
Petitioner and respondents disagree regarding the type of trust that is at issue herein. Petitioner argues that the trust is a support or spendthrift trust, and respondents argue that the trust is a discretionary trust.
Under a discretionary trust, the trustee may pay to the beneficiary as much of the income or principal as the trustee in his discretion determines to be appropriate. Conversely, under a support trust, the trustee shall pay so much of the income and such amounts of principal as the trustee deems proper for support, maintenance, and welfare. Trusts with spendthrift provisions provide that the beneficiary’s interest shall not be transferable or subject to the claims of creditors, unless the spendthrift provision allows ordinary creditors to reach trust assets.
The key difference between discretionary trusts, support trusts, and spendthrift trusts, for petitioner’s purposes, is that creditors, including petitioner, cannot compel the trustee of a discretionary trust to pay any part of the income or principal in order that the creditors may be paid. The opposite is true of spendthrift and support trusts, which allow trust assets to be reached to satisfy creditors, including creditors seeking to satisfy claims for child support and alimony.
Petitioner argues that the use of the word “shall” in the terms of the trust indicates that the trust is a support or spendthrift trust, whereas respondents argue that the use of the words “sole and absolute discretion” indicate that the trust is a discretionary trust.
A court must ascertain and give effect to the settlor’s intent when resolving a dispute concerning the meaning of a trust.
At several intervals, the trust document states that respondents, as trustees, are permitted to use their sole and absolute discretion in applying any part of the trust income or principal for Ex-husband’s benefit, indicating that it is a discretionary trust, and not a spendthrift or support trust.
The trust provisions at issue in this case give respondents discretion to determine whether to distribute the income and principal of the trust to its beneficiaries, including Ex-husband, as contemplated in MCL 700.7103(d). Thus, this Court must conclude that the trust is discretionary. Because the trust is discretionary, creditors, including petitioner, cannot reach the trust assets.
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