Probate & Trust Law Section Conference Manual ... - Minnesota CLE

D. Spendthrift Clauses
Finally, the Court held that the remainder beneficiaries’ attorneys’ fees
should have been paid from the principal of the trust rather than the
income of the trust, as the district court had ordered, because their
challenges related to the trustee’s distribution of principal.
1. Rush University Medical Center v. Sessions, 980 N.E.2d 45 (Ill. 2012).
The Fraudulent Transfer Act did not abrogate the common law rule
that a self-settled spendthrift trust was void as to existing and future
creditors. Rush University Medical Center (the “University”) sought the
payment of $1.5 million from certain trusts based on a philanthropic
pledge that the decedent had made to the University prior to his death.
Based upon this pledge (which the decedent reiterated and provided for in
his subsequent will and codicils), the University constructed a building
which it dedicated to the decedent despite never having received any
actual funding from him. In 1994, prior to making this pledge, the
decedent settled an irrevocable trust (the “Sessions Family Trust”) that he
funded with Illinois real estate and a 99% limited partnership interest in a
Colorado FLP. The Sessions Family Trust was governed by Cook Islands
law, and, as permitted under that law, the decedent was a beneficiary of
the trust as well as the trust protector. In 2005, having made no payments
on the pledge, the decedent was diagnosed with terminal cancer. The
decedent blamed the doctors at the University for not diagnosing his
cancer early enough to be able to take effective action. As a result, the
decedent revoked his will and all codicils that had provided funding for
the pledge. He died shortly thereafter. The University sued the trust on
several grounds. Ruling in favor of the University, the Illinois Supreme
Court relied on the principle “that if a settlor creates a spendthrift trust for
his own benefit, it is void as to existing or future creditors and such
creditors can reach the settlor’s interest under the trust.”
2. *Fannie Mae v. Heather Apartments Limited Partnership, 811
N.W.2d 596 (Minn. 2012). The debtor’s/beneficiary’s interest in his
father’s spendthrift trust was not property due to the beneficiary. An
Oklahoma district court entered a judgment against an individual in favor
of Fannie Mae to collect on a commercial mortgage loan. Fannie Mae
learned that the individual was a beneficiary of a spendthrift trust created
by his father. Fannie Mae filed a motion for a temporary restraining order
to prohibit the individual from transferring or disposing of any interest he
had in his father’s estate. The district court granted the motion and,
following briefing and a hearing, converted the order into a temporary
injunction pursuant to Minn. Stat. § 575.05. The Minnesota Supreme
Court held that the plain language of Minn. Stat. § 575.05 allowed a
district court to order a debtor’s property to be applied toward the
satisfaction of a judgment provided the property is in the hands of the
debtor, in the hands of another person, or is property due to the debtor.
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