State Street Bank and Trust Co. v. Reiser
389 N.E.2d 768 (1979)
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Rule of Law:
Where a person places property in a trust and reserves the power to amend and revoke the trust or to direct the disposition of principal and income, the settlor’s creditors may reach those trust assets after the settlor's death to satisfy debts to the extent the settlor's estate is insufficient.
Facts:
- On September 30, 1971, Wilfred A. Dunnebier created a revocable inter vivos trust.
- Dunnebier transferred the stock of five closely held corporations into the trust, retaining the power to amend or revoke it and direct the disposition of its assets during his lifetime.
- Contemporaneously, Dunnebier executed a will that designated the trust as the beneficiary of his residuary estate.
- On November 1, 1972, Dunnebier secured an unsecured personal loan of $75,000 from State Street Bank and Trust Company.
- During the loan process, Dunnebier indicated he controlled the corporations whose stock was held in the trust but did not disclose the trust's existence.
- Approximately four months after taking the loan, Dunnebier died in an accident.
- Dunnebier's probate estate lacked sufficient assets to repay the outstanding loan to the bank.
Procedural Posture:
- State Street Bank and Trust Company brought an action against the trustees of Wilfred A. Dunnebier's inter vivos trust in a Massachusetts probate court.
- The bank sought to compel the trustees to use trust assets to pay a debt owed by Dunnebier's estate.
- The probate court judge found for the trustees, ruling that the trust assets could not be reached by the estate's creditors.
- State Street Bank and Trust Company appealed the probate court's judgment to the Appeals Court of Massachusetts.
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Issue:
Can the creditors of a deceased settlor's estate reach the assets of a revocable trust created by the settlor, over which the settlor retained full control during his lifetime, to satisfy debts that the estate cannot pay?
Opinions:
Majority - Kass, J.
Yes. Where a settlor retains extensive powers over a trust's assets during his lifetime, such as the power to revoke, amend, and direct disposition, his creditors may access those assets after his death to satisfy his debts if his probate estate is insufficient. The court reasoned that a settlor's power over such a trust is equivalent to a general power of appointment. Equity dictates that property the settlor could have used to pay his debts should be available to his creditors. To hold otherwise would be an 'excessive obeisance to the form' of the trust and would violate the public policy that a person should not have an estate to live on but not one to pay his debts with. The court distinguished this from assets that 'pour over' into the trust after the settlor's death, which are not subject to creditors' claims because the settlor did not have control over them during life.
Analysis:
This case establishes a significant precedent by aligning the treatment of revocable trusts with that of property subject to a general power of appointment for the purpose of creditors' claims after the settlor's death. It prevents the use of a common estate planning tool—the revocable living trust—as a device to shield assets from creditors while the settlor retains complete control and enjoyment during life. The decision prioritizes the equitable claims of creditors over the interests of the trust's beneficiaries, solidifying the principle that dominion and control are tantamount to ownership when satisfying a decedent's debts.
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