Summary
In Martin, a trust beneficiary's ex-wife sought to compel the trustees of a discretionary trust to satisfy her ex-husband's alimony obligation with trust funds.
Summary of this case from Kryzsko v. Ramsey County Social ServicesOpinion
No. 77-557
Decided April 26, 1978.
Trusts — Discretionary payments to beneficiary — Judgment creditor's right to reach income and principal — Beneficiary's right to principal and undistributed income at trust termination.
1. A trust conferring upon the trustees power to distribute income and principal in their "absolute discretion," but which provides standards by which that discretion is to be exercised with reference to needs of the trust beneficiary for education, care, comfort or support, is neither a purely discretionary trust nor a strict support trust, and the trustees of such trust may be required to exercise their discretion to distribute income and principal for those needs.
2. In the absence of language in a trust instrument showing an intention on the part of the settlor that trust income and principal payable to the trust beneficiary for support be used for the payment of alimony, such income and principal is not reachable by a judgment creditor for that purpose.
3. A trust beneficiary's right to receive distribution of principal and undistributed income upon termination of the trust is an equitable future interest which is alienable even though the right to distribution is conditioned upon survival of the beneficiary to the time of termination of the trust.
APPEAL from the Court of Appeals for Lucas County.
Plaintiff, Ruby P. Martin, a judgment-creditor of her former husband by virtue of an award of alimony in divorce proceedings, filed an action in the Court of Common Pleas of Lucas County, seeking a judgment ordering the trustees of a trust, of which her ex-husband, Fred J. Martin, is a beneficiary, to pay from his interest in the trust sufficient funds to satisfy the amount of the judgment, plus interest and costs.
Defendants Donald J. Martin, Walter H. Zebulske, Benedict L. Martin, James J. Martin and Raymond J. Martin are the current trustees of the trust. Fred J. Martin and a law firm, Messrs. Shumaker, Loop Kendrick, which maintains a trust account for the benefit of Fred J. Martin containing funds paid from the trust for Fred J. Martin, are also named as party defendants.
The trust, which was executed in 1955 for the benefit of the 12 children of the donor, Frederick M. Martin, Jr., provides in part:
"ARTICLE II"Payments and Distributions to the Beneficiaries
"Section 1. Upon the execution hereof, the Trustees shall divide the trust estate into twelve (12) equal parts or parcels, designating one such parcel for a particular one of the * * * children of Donor. each such part or parcel shall be held and administered by the Trustees as a separate trust for the benefit of the particular child for whom such part or parcel is so designated and under certain circumstances as hereinafter provided for the issue of such child. The division into such parts or parcels as determined by the Trustees shall be final, conclusive and binding upon all concerned, the Trustees being hereby authorized in making such divisions to allocate to various parts or parcels undivided interests in trust assets or to accomplish such divisions in any other manner deemed by the Trustees to be fair and equitable.
"Section 2. The separate trusts so created for each such child of Donor shall be held and administered as follows:
"(a) Until such time as the principal of each trust has been distributed in the manner hereinafter provided, the Trustees shall from time to time pay to the child for whom such trust is designated, if such child be over twenty-one (21) years of age at the time of such distribution, so much of the net income and, if necessary, of the principal of such trust held for such child as Walter H. Zebulske, as one of the Trustees, or any successor appointed to succeed him as trustee, in his or her sole and absolute discretion, shall deem necessary or advisable for the comfort, care, support and education of such adult child of Donor.
"(b) If in any calendar year the entire net income for such year of such trust is not distributed to the child of Donor for whom such trust is designated, then the Trustees shall pay to or for the account of all or any of the issue of such child of Donor so much of the balance of such net income as Walter H. Zebulske, as one of the Trustees, or any successor appointed to succeed him as trustee, in his or her sole and absolute discretion, shall deem necessary or advisable for the comfort, care, support and education of such issue.
"(c) In computing the amount of such distributions under items (a) and (b) of this Section 2 of Article II, there shall be taken into consideration any other income or funds available to such distributee.
"(d) Net income not distributed in any calendar year under items (a) and (b) of this Section 2 of Article II shall be accumulated and added to the principal of said trust.
"(e) In the event that during the term of any such trust, any child of Donor, for whom such a trust has been designated as aforesaid, shall die leaving issue surviving then the Trustees shall continue to hold and administer such trust for the benefit of the issue of such deceased child of Donor. The Trustees, under such circumstances, are hereby empowered to make such distributions of income or of principal, if necessary, to or for the account of such issue or to or for the account of any of them, as Walter H. Zebulske, as one of the Trustees, or any successor appointed to succeed him as trustee, in his or her sole and absolute discretion, after taking into consideration any other income or funds available to such distributee, shall deem necessary or advisable for the comfort, care, support and education of such distributee.
"(f) In the event that prior to the time hereinafter fixed for the termination of the trusts hereby created, any child of Donor for whom such a trust is designated shall die leaving no issue surviving, the principal and undistributed income of the trust designated hereunder for such child shall be divided by the Trustees into as many equal parts as there are above-named children of Donor then living, and deceased above-named children of Donor leaving issue then living. Each such part thus segregated shall be added to and become a part of the trust then being held and administered hereunder for such living child of Donor or for such living issue of such deceased child of Donor.
"Section 3. The trust hereby created shall terminate at twelve o'clock noon, Eastern Standard Time, on the date which is twenty-five (25) years from the date shown hereunder to be the date of execution of this trust agreement. Upon such termination, the Trustees shall distribute to each living child of Donor the principal and undistributed income of the trust created and designated hereunder and then being held and administered hereunder for such child. Upon such termination, the Trustees shall distribute to the living issue of any deceased child of Donor for whom a trust is created and designated hereunder, the principal and undistributed income of the trust designated hereunder and then being held and administered hereunder for such issue, share and share alike. Upon such termination, if there be no child of Donor then living or issue of deceased children of Donor then living, the Trustees shall distribute the entire trust estate to a charity of their selection.
"* * *
"ARTICLE III "Prohibition Against Alienation"Section 1. If the beneficiaries hereunder shall attempt at any time or times to alienate, sell, conspire, assign, pledge or otherwise encumber the whole or any part of the income and/or principal reserved to such beneficiary, or if any such beneficiary should become a debtor in bankruptcy proceedings, or if any creditor or person having a claim or demand of any sort against any such beneficiary, levies an attachment or otherwise attempts to subject the income and/or principal reserved hereunder to such beneficiary to the satisfaction of such beneficiary's debts or other obligations, then and in that event and from that time forward, the absolute right of such beneficiary to the income and/or principal hereunder reserved shall cease and determine and all income and/or principal hereunder reserved for such beneficiary, shall thereafter be held and distributed by the Trustees during the remainder of the life of the trust for such beneficiary in all or any of the following ways:
"(a) All or any part of such income may be accumulated, or
"(b) Such part of such income, accumulated income and principal which may be needed or desirable for the education, care, comfort or support of such beneficiary or such beneficiary's spouse and/or issue, if any, may be paid to or applied to the use of such beneficiary or such beneficiary's spouse and/or issue, if any, as the Trustees in their absolute and uncontrolled discretion think fit."
The trial court made the following findings and granted judgment in accordance therewith:
" * * * [T]hat Fred J. Martin is the beneficiary of a discretionary spendthrift trust with a forfeiture provision; that the claim of Ruby P. Martin for alimony is not a creditor's claim, as contemplated by settlor, which is barred by spendthrift provisions or which would result in a forfeiture of Fred J. Martin's interest therein; that Fred J. Martin's interest in the trust is unimpaired and that the trustees are obligated to treat Fred in the same manner as any other beneficiary; that because of the discretionary nature of the trust Fred J. Martin has no vested property interest therein which Ruby P. Martin may reach in satisfaction of her judgment at this time; that a lien is not created in Ruby P. Martin's favor against the trust corpus; that Ruby P. Martin may reach any income accumulated in the Shumaker, Loop Kendrick trust, which has already vested in Fred J. Martin, as well as any future payments the trustees may make to Fred J. Martin."
Upon appeal, the Court of Appeals reversed in part and affirmed in part the judgment of the Court of Common Pleas. That court entered judgment granting plaintiff "* * * a lien upon any property or amounts of money distributed or to be distributed to or for the benefit of defendant Fred J. Martin by defendant-trustees * * * pursuant to the trust agreement" and ordered "that any property, money, or disbursements from corpus or income which become payable to or for the benefit of defendant Fred J. Martin pursuant to the trust agreement be paid by the trustees to plaintiff * * * to be applied upon payment of plaintiff's judgment against Fred J. Martin until the same is satisfied in full."
The cause is now before this court pursuant to the allowance of a motion to certify the record.
Messrs. Eastman, Stichter, Smith Bergman, Mr. Jamille G. Jamra and Mr. David M. Jones, for appellee.
Messrs. Shumaker, Loop Kendrick, Mr. Robert B. Gosline and Mr. Thomas I. Webb, Jr., for appellants, Fred J. Martin, Donald J. Martin, Walter H. Zebulske, Benedict L. Martin and James J. Martin.
Appellants' arguments are encompassed in three propositions of law, which state as follows:
1. "A trust which provides that distributions shall be made in the sole and absolute discretion of the trustee is a discretionary trust and as such is not subject to being reached by a creditor's bill brought by a creditor of one of the beneficiaries."
2. "A divorced wife holding an out-of-state lump sum alimony award reduced to an Ohio judgment has no different status nor greater rights than any other judgment creditor."
3. "A trust which terminates at a specified date and which is to be distributed at that time to each living child of the donor or to the living issue of any deceased child of the donor (who shall succeed to such deceased child's share) does not create a vested interest in any such child until the time for distribution, survival to such date being a condition precedent to vesting."
Under their first proposition of law, appellants urge that the trust in question is a discretionary trust and, therefore, the trust property can not be reached by a creditor of a beneficiary.
The trust instrument provides, in Section 2(a), Article II, that until the principal of the trust is distributed "the Trustees shall from time to time pay to the child for whom such trust is designated * * * so much of the net income and, if necessary, of the principal of such trust held for such child as Walter H. Zebulske, as one of the Trustees, or any successor appointed to succeed him as trustee, in his or her sole and absolute discretion, shall deem necessary or advisable for the comfort, care, support and education of such adult child of Donor."
The trust instrument provides, in Article III, entitled "Prohibition Against Alienation," as follows:
"Section 1. If the beneficiaries hereunder shall attempt at any time or times to alienate, sell, conspire, assign, pledge or otherwise encumber the whole or any part of the income and/or principal reserved to such beneficiary, or if any such beneficiary should become a debtor in bankruptcy proceedings, or if any creditor or person having a claim or demand of any sort against any such beneficiary, levies an attachment or otherwise attempts to subject the income and/or principal reserved hereunder to such beneficiary to the satisfaction of such beneficiary's debts or other obligations, then and in that event and from that time forward, the absolute right of such beneficiar to the income and/or principal hereunder reserved shall cease and determine and all income and/or principal hereunder reserved for such beneficiary, shall thereafter be held and distributed by the Trustees during the remainder of the life of the trust for such beneficiary in all or any of the following ways:
"(a) All or any part of such income may be accumulated, or
"(b) Such part of such income, accumulated income and principal which may be needed or desirable for the education, care, comfort or support of such beneficiary or such beneficiary's spouse and/or issue, if any, may be paid to or applied to the use of such beneficiary or such beneficiary's spouse and/or issue, if any, as the Trustees in their absolute and uncontrolled discretion think fit."
The foregoing provisions of the trust instrument are similar to the provisions of the testamentary trust construed by the court in Bureau of Support v. Kreitzer (1968), 16 Ohio St.2d 147, 243 N.E.2d 83. Those provisions read:
"* * * [I]n the event a share is established upon my death for the benefit of my daughter, Naomi M. Swallow, the trustee shall distribute, in its sole and absolute discretion, so much of the income and the principal of her share as it, in its sole and absolute discretion, determines to be necessary for her care, comfort, maintenance and general well-being for and during her lifetime. Any income from her share of the trust estate not distributed by the trustee as hereinabove provided for her benefit shall be divided equally among the other shares of the trust * * *."
It was argued in Kreitzer that the beneficiary had "no claim to any distribution." The court determined otherwise, reasoning, at page 150, as follows:
"* * * The trust is equivocal. It confers upon the trustees `absolute and sole discretion,' but defines the standard by which that discretion is to be employed. It can, therefore, be characterized neither as a purely discretionary trust nor as a strict support trust. See 1 Restatement of the Law, Trusts, 2d 320, 323, Sections 154, 155.
"Admittedly, the beneficiary of a discretionary trust for care, comfort, maintenance or well-being is endowed with no property which an ordinary creditor may reach. When, however, a fiduciary's discretion, notwithstanding it is `absolute or sole,' is to be exercised with reference to needs for care and maintenance, that discretion cannot be wholly beyond a review which measures the actual need against the standard by which payments may be made. 3 Scott on Trusts (3 Ed), 1501, Section 187, Control of Discretionary Powers; 1 Restatement of the Law, Trusts, 2d 408-409, Section 187."
Thus, the trust in question may be characterized as being neither "a purely discretionary trust nor as a strict support trust." Therefore, appellants' argument, that due to the discretionary nature of the trust the trust property may not be reached by a creditor, is not well taken.
The terms of the trust here indicate that the trustees are empowered in their "sole and absolute discretion" or their "absolute and uncontrolled discretion" to distribute income and principal to the beneficiaries. That "absolute" discretion, however, as was the case in Kreitzer, "is to be exercised with reference to needs" for either the "comfort, care, support and education of such adult child of donor" or, in the event of attempted alienation or attachment for debt, the "education, care, comfort or support of such beneficiary or such beneficiary's spouse and/ or issue."
The latter quoted provision from the trust instrument evinces an intention on the part of the settlor that the trustees may be required to exercise their discretion to distribute income or principal for the purposes there described in the event of attempted alienation or attachment for debt. Application of the rationale of the Kreitzer case here leads to the conclusion that the trustees can be required, after attempted alienation or attachment, to distribute income or principal for purposes of "education, care, comfort or support of such beneficiary or such beneficiary's spouse and/or issue," and that debts incurred for the enumerated purposes are obligations which the trustees are required to discharge.
It is thus necessary to determine whether appellee's claim as a judgment creditor falls within the ambit of those debts which the trustees may be required to satisfy from the trust income and principal prior to distribution of the corpus. The determination of this issue will resolve the question posed in appellants' second proposition of law which asserts that a divorced wife's judgment for alimony should not be accorded a favored status over claims of other creditors.
Stated in the language of the trust which is pertinent to this issue, the question is whether the trustees are obligated under their directions to pay for "support of such beneficiary or such beneficiary's spouse" to satisfy the judgment which is based on appellee's alimony award.
The first determination to be made here, which is self-evident, is that appellee is no longer the spouse of the beneficiary and, therefore, she does not fall within the provision which would entitle her, as spouse of the beneficiary, to support. The second determination to be made is whether the obligation of the trustees to "support" the beneficiary extends to payment of appellee's alimony.
There appears to be a split of authority on the question of whether the income of a trust for support of a husband can be reached to satisfy an ex-wife's claim for alimony or child support. Annotation, 91 A.L.R. 2d 262, 272.
1 Restatement of Trusts 2d, 328, Section 157, provides, in part:
"Although a trust is a spendthrift trust or a trust for support, the interest of the beneficiary can be reached in satisfaction of an enforceable claim against the beneficiary, (a) by the wife or child of the beneficiary for support, or by the wife for alimony; * * *"
The Comment on Section 157(a) reads in part:
"Although a trust is a spendthrift trust or a trust for support, the interest of the beneficiary can be reached in satisfaction of an enforceable claim against him for support by his wife or children. In some cases a spend-thrift clause is construed as not intended to exclude the beneficiary's dependents. Even if the clause is construed as applicable to claims of his dependents for support, it is against public policy to give full effect to the provision. The beneficiary should not be permitted to have the enjoyment of his interest under the trust while neglecting to support his dependents. * * *"
Inasmuch as the trust instrument here provides for the support of the beneficiary's issue, the question of whether the trust income is reachable for child support is not presented. The pertinent language of the trust instrument does not show an intention on the part of the settlor that trust income be used for the payment of alimony. For this court to hold that trust income can be devoted to alimony in such circumstances would go beyond the terms of the trust as established by the settlor and, in effect, engraft additional terms to the trust and impute an intention to the settlor not warranted from the trust instrument itself. As stated in Erickson v. Erickson (1936), 197 Minn. 71, 78, 266 N.W. 161:
"* * * If alimony or support money is to be an exception to the protection offered by spendthrift provisions, it must be by some justifiable interpretation of the donor's language by which such implied exception may be fairly construed into the instrument of trust."
In the absence of language in the trust instrument showing an intention on the part of the settlor that trust income for support of the beneficiary be used for the payment of alimony, this court is unwilling to hold that such income is reachable by a judgment creditor for that purpose.
The foregoing holding, of course, applies only to disbursements of income and principal during the life of the trust inasmuch as Section 1, Article III of the trust instrument, which instructs the trustees as to distribution in the event of attempted alienation or attachment, applies only "during the remainder of the life of the trust." The trust instrument provides upon termination of the trust that "the Trustees shall distribute to each living child of Donor the principal and undistributed income of the trust * * * then being held and administered * * * for such child."
Appellants' third proposition of law is to the effect that the beneficiary has no interest in the trust property which is to be distributed upon termination of the trust since survival until that time is a condition precedent to vesting of such interest in the trust property.
Although it is true that the beneficiary's distribution is dependent upon his being in existence at that time and the amount to be distributed is indefinite and not now capable of ascertainment, the trustees have no discretion but to make distribution to the beneficiary upon termination of the trust. Thus, the distribution of the principal and undistributed income upon termination of the trust is different from distribution of the income and principal during the life of the trust.
The beneficiary's right to receive distribution of the principal and undistributed income upon termination of the trust is an equitable future interest. "A future interest, whether contingent or executory, is alienable." Moore v. Foresman (1962), 172 Ohio St. 559, 179 N.E.2d 349; R.C. 2131.04. Thus, the interest of the beneficiary upon termination of the trust can be subjected to a court order requiring the trustees to apply to appellee's judgment "any property, money or disbursements from corpus or income which become payable to or for the benefit of defendant Fred J. Martin * * * until the same is satisfied in full," as ordered by the Court of Appeals.
The judgment of the Court of Appeals, as it relates to distribution of income and principal prior to termination of the trust, is reversed; but, as it relates to distribution of principal and undistributed income upon termination of the trust, the judgment of the Court of Appeals is affirmed.
Judgment reversed in part and affirmed in part.
HERBERT, P. BROWN, SWEENEY and LOCHER, JJ., concur.
W. BROWN, J., concurs in the judgment.
CELEBREZZE, J., dissents.