The U.S. Court of Appeals for the Tenth Circuit finds that a spendthrift clause in a trust is not enforceable even though no distributions from the trust have been made because the trust had effectively terminated. In Re Hilgers (U.S. Ct. App., 10th Cir., No. 07-3233, May 20, 2008).
Philip Hilgers was trustee and beneficiary of trusts set up by his parents and grandparents. The trusts, which contained spendthrift clauses, provided life estates to Mr. Hilger's parents. On the death of the life beneficiaries, the remaining property was to be divided equally among Mr. Hilger and his three siblings. Mr. Hilger's mother and father died, but Mr. Hilger did not make distributions from the trusts. Three years later, he filed for bankruptcy.
The bankruptcy trustee filed a claim, seeking a declaration that the trust assets were part of Mr. Hilger's bankruptcy estate. The bankruptcy court found that the trusts had terminated, so the assets were a part of the bankruptcy estate. Mr. Hilger appealed, arguing the spendthrift clause prevented the trust assets from being included in his bankruptcy estate.
The U.S. Court of Appeals for the Tenth Circuit affirms, holding that because the trusts had terminated, the spendthrift clause was no longer applicable and Mr. Hilger's interest in the trusts became a part of his bankruptcy estate. According to the court, the trusts terminated when Mr. Hilger's parents died, and creditors have a right to compel distribution of the trust assets.
To download the full text of this decision in PDF, go to: https://www.ck10.uscourts.gov/opinions/07/07-3233.pdf.
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