A beneficiary of a trust has a legal interest in the assets held by the trust. For many reasons, a beneficiary may want to sell or otherwise encumber his or her interest in the trust. Can a beneficiary do that? A Grand Forks trust attorney at German Law discusses the rights of s trust beneficiary, specifically including the right to sell his or her interest in the trust.
Why Might You Want to Sell Your Interest in a Trust?
Typically, one of the primary motivations for a Settlor to use a trust to distribute assets is the ability to do so slowly, over time, instead of in one lump sum. For a trust beneficiary that means waiting (often for years) to receive the full value of his/her interest in the trust assets. If a beneficiary needs money right now though, the option to sell that interest to a third party at a discounted rate may sound very tempting.
The Trust Agreement Rules
Whether or not a beneficiary can sell his/her interest in a trust requires looking first to the trust agreement itself. In fact, many trust agreements include an anti-alienation clause that effectively prevents a beneficiary from selling or encumbering their interest in the trust. Conversely, the provisions of a trust will sometimes give a beneficiary the power of appointment which can give a beneficiary the ability to transfer his or her inheritance to a third party. A general power of appointment lets a beneficiary transfer his/her interest in the trust to almost anyone, including creditors.
What If the Trust Agreement Is Silent?
If the trust agreement is silent on the issue, we look to the law. An important distinction must be made at this point. A beneficiary cannot outright sell assets held in a trust, even if the beneficiary is the only beneficiary, because although the beneficiary has a legal interest in the trust assets, those assets are legally owned by the trust until such time as they are distributed to the beneficiary. A beneficiary may be able to sell his/her future interest in, or right to, those assets only. Moreover, the Trustee has a legal obligation to abide by the trust terms, meaning the Trustee cannot distribute assets early if the trust doesn’t allow it. If there are numerous beneficiaries, it becomes even less likely that a beneficairy will be able to convince the Trustee to authorize an early distribution because a Trustee cannot distribute assets to one beneficiary without distributing to all beneficiaries. Finally, if the trust has a spendthrift provision that is specifically intended to prohibit a beneficiary from selling or encumbering assets, then you must turn to state law to determine if the law will enforce that provision.
What Does North Dakota Law Say?
North Dakota Century Code Section 59-13-02 (502) governs spendthrift provisions within a trust, stating as follows:
- A spendthrift provision is valid if it restrains either the voluntary or involuntary transfer or both the voluntary and involuntary transfer of a beneficiary’s interest.
- A term of a trust providing that the interest of a beneficiary is held subject to a spendthrift trust, or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary’s interest.
- A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this chapter, a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.
Sub-section 502 makes it clear that if the trust includes a spendthrift provision, a beneficiary cannot sell or encumber his/her interest in a trust. Sub-section 503, however, provides exceptions to that general rule. Under that section, a spendthrift provision is unenforceable against:
- A beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance;
- A judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust; and
- A claim of this state or the United States to the extent a statute of this state or federal law so provides.
In short, sub-section 503 allows certain creditors to reach the assets held in a trust; however, it does not allow a beneficiary to voluntarily sell or encumber those assets.
Contact a Grand Forks Trust Attorney
Please join us for an upcoming FREE seminar. If you have additional questions about or concerns about selling or encumbering your interest in a trust, contact a Grand Forks trust attorney at German Law by calling 701-738-0060 to schedule an appointment.