I told you two nights ago, in a post about digital price tags and retailing, that one of my cousins was getting married yesterday. On the drive to the ceremony, I was reading a book I bought sometime in the past few months (I can’t remember when or where I purchased it – it just showed up and was in one of the boxes that routinely pile up as I find things interesting I want to study and figure I’ll get to them someday). It’s called Gratuitous Transfers: Wills, Intestate Succession, Trusts, Gifts, Future Interests, and Estate and Gift Taxation Cases and Materials. It’s fantastic reading material to the point I’m having a hard time putting it down.
One of the things that has stuck with me, and I’ve been contemplating for the past twenty-four hours, is the passage on alienability of beneficiary’s interest, particularly as in regard to spendthrift trusts. Many of you do now, or will at some point in the future, have an interest in using spendthrift trusts given your demographics. The problem I’m having is coming to a conclusion as to the morality of tort claims against them. Should there be a public policy exclusion? I can’t decide. I might have to throw it on my “too hard” pile.
Let me backup for a moment.
In case you’ve forgotten: In plain English, a spendthrift trust is a type of trust fund in which you can place assets for the benefit of some third party, most commonly your children, grandchildren, nieces, nephews, friends, husband, or wife, that prohibits the person benefiting from the income and assets (the beneficiary) from touching the money itself, selling the right to the income stream, taking on debt against it, or in any way encumbering that flow of money since they don’t, technically, own it. For example, you could leave your three kids $10,000,000 worth of Coca-Cola stock, saying they are only entitled to the annual dividend income (in this case, $300,000 per annum), but can never sell or borrow against either the shares themselves or the future right to receive the dividend stream. Then, when your kids die, all of the money gets distributed to your ten grandchildren. That way, even if one of your kids turns out to be a bum, they aren’t homeless and the wealth still stays in the family tree, waiting to be passed on to the third generation.
The courts in the United States have generally, but not always, found that creditors are out of luck when they try to go after the money in a spendthrift trust because they never should have relied on it when extending credit in the first place. This protects the intention of the person who made the gift to the trust, ensuring their money is spent how they wanted it spent (e.g., paying for college, covering the rent, providing a grocery budget, establishing a regular clothing and automobile budget, et cetera). After all, if Great Aunt Bertie had known you were going to run up medical debt, she wouldn’t have gifted you money outright just so the hospital can turn around and take it. Instead, she would have paid your mortgage, bought you a car, or kept your pantry stocked with food. The spendthrift trust is acting in her place. It is not your money. It was never your money. If it weren’t you benefiting from the money, she never would have made the gift.
This can lead to ugly, seemingly unjust situations. On page 511, the textbook goes into the case of Sligh v. First National Bank of Holmes County, ultimately heard by the Supreme Court of Mississippi in 1997. The facts are laid out in the tome as follows:
On January 30, 1993, William B. Sligh was involved in an automobile accident with Gene A. Lorance, an uninsured motorist who was operating a vehicle while intoxicated. As a result, Will Slight suffered a broken spine and resulting paralysis, including loss of the use of both legs, loss of all sexual functions and loss of the ability to control bowel and urinary functions. Lorance was convicted of the felony of driving under the influence and causing bodily injury to another, for which he was sentenced to serve ten years, with six years suspended, in the custody of the Mississippi Department of Corrections.
Lorance had no real assets of which to speak but he was the lifetime beneficiary of two trusts, which “each have two remaindermen, Virginia Tate and William C. Bardin”. Meaning when Lorance died, the property that had been providing him dividends, interest, rents, and other passive income would actually be inherited by the other two people. The trusts were established by Lorance’s mother, and the courts interpreted them as having spendthrift protections based upon the intent at the time the were settled.
Attempting to recover the cost of medical bills and damages from this monster who destroyed their lives, Will and Lucy Sligh filed a Writ of Garnishment, trying to get their hands on the wealth held within the trusts. They alleged that “Lorance’s mother, Edith Lorance, had actual knowledge of the following facts: her son was an habitual drunkard who had been unsuccessfully treated for alcoholism; he was mentally deficient and had been previously committed to mental institutions; he had impaired facilities due to his alcoholism and mental disorders; he regularly operated motor vehicles while intoxicated; he was a reckless driver who had been involved in numerous automobile accidents; and he had been arrested and convicted on numerous occasions for driving under the influence. The complaint alleged that despite her actual knowledge of these facts, Mrs. Lorance established the two trusts as part of her intentional plan and design to enable her son to continue to leave his intemperate, debauched, wanton and depraved lifestyle while at the same time shielding his beneficial interest in the trusts from the claim of his involuntary tort creditors” [Page 512-513].
The question: What is the best, most moral outcome for society? I don’t mean in this particular case, where there are state laws involved so the question of justice might be different from the question of the right technical answer. I mean, in a perfect society where we were designing the best possible framework for the population, what leads to the least harm?
On one hand, Lorance does not own the money in the trust. It was the mother’s property and she intended for Virginia Tate and William Bardin to inherit it. However, in her absence, she wanted the trust be able to provide for her son just like she would have were she able to do so, paying for his living expenses and lifestyle even if he were effectively bankrupted by his horrible actions and terrible decisions. To say the victims in this case, the Slighs, are somehow harmed by the injustice of not being able to tap the trust assets seems wrong because the trust assets do not belong to Lorance. If the mother had been still physically holding the money, gifting it to her son regularly rather than the trust, they wouldn’t have had any opportunity to force her to hand over her wealth. She would have kept supporting him then left it all to William and Virginia after he son died. To demand the trust repay the Slighs is as immoral as demanding the government confiscate the money from the mother were she still alive. There is little difference.
On the other hand, as the authors point out by quoting other rulings, tort creditors, in this case the Slighs, did not choose to extend credit to Lorance. They were forced to do so by his actions and now he is in their debt. Quoting Austin W. Scott in The Law of Trusts, the textbook says on page 518, “… there seems to be something rather shocking in the notion that a man should be allowed to continue in the enjoyment of property without satisfying the claims of persons whom he has injured. It may well be that it is against public policy to permit the beneficiary of a spendthrift trust to enjoy an income under the trust without discharging his tort liabilities to others.”
(And it is shocking. In a New Hampshire trust case known as Scheffel v. Krueger, a convicted child molester, who was the beneficiary of a 1985 spendthrift trust established by his grandmother, was allowed to continue to enjoy all of the wealth produced by his trust fund after the courts denied his victim access to the money. Imaging the sense of injustice that must elicit. Someone does something so evil to you, then gets to go about their life living off this huge pile of money you can’t touch even though it has been awarded to you all because it isn’t, technically, their money. They just get to spend it.)
No matter how many times I go through the problem, I think I come down on the side that tort claims should not lead to a public policy exemption because the donors almost assuredly wouldn’t have gifted the property were the money going to go to the creditors. This not only undoes their intent, but deprives any innocent remainder or future income beneficiaries of wealth that was destined for their hands. Sure, you occasionally get an infuriating miscarriage of justice, but overall, the system seems to be better. If spendthrift trusts aren’t immune to torts, you’ll start seeing all sorts of other convoluted behavior to try and minimize liability, which isn’t particularly great for society, either.
In the Sligh v. First National Bank of Holmes County case, the trial court ruled in favor of protecting the trust, but was then reversed by the state high court, which allowed the victims to access the trust assets. However, the Mississippi legislature was unhappy with this outcome so to prevent it from playing out again in the future, it modified the statutes in 1998 in a way that spendthrift trusts were beyond the reach of tort claims under most circumstances. Since then, it has had a few schizophrenic developments as it seems to be struggling with the same question; e.g,. on June 30th, 2014, the governor of Mississippi, Phil Bryant, signed the “Mississippi Qualified Disposition in Trust Act” law that allows self-settled spendthrift trusts in certain situations, joining the handful of other states who have this relatively new creation. It means you can setup a trust fund for yourself, and put aside money beyond the reach of creditors provided it isn’t done fraudulently. However, it specifies that these self-settled spendthrift trusts are not immune from tort claims involving death, personal injury, or property damage. I’m not sure why anyone would opt for it, as there are much more attractive options in other states (particularly Nevada), but it’s interesting nonetheless.