Wilcox v. Gentry
867 P.2d 281, 254 Kan. 411, 1994 Kan. LEXIS 12 (1994)
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Rule of Law:
In a discretionary trust that lacks a spendthrift provision, once a trustee has been served with a creditor's garnishment order, any payment the trustee makes, whether directly to the beneficiary or to a third party for the beneficiary's benefit, is subject to the creditor's claim.
Facts:
- In 1985, Frank Gentry created a revocable Trust.
- The Trust provided that after Frank Gentry's death, a share of the assets would be held in a discretionary trust for Isabell Gentry.
- The trustee had sole discretion to distribute income and principal either directly 'to' Isabell or 'on her behalf'.
- The Trust did not contain a spendthrift provision, which would have restricted the transfer of a beneficiary's interest.
- Frank Gentry died, activating the trust provision for Isabell.
- Separately, Ron and Nancy Wilcox obtained a money judgment against Isabell Gentry for fraud related to a property sale.
- The Wilcoxes attempted to collect on their judgment by garnishing Isabell Gentry's interest in the Trust.
Procedural Posture:
- Ron and Nancy Wilcox obtained a judgment against Isabell Gentry for fraud and damages.
- The Wilcoxes initiated a garnishment proceeding against the Frank Gentry Trust in the district court to satisfy the judgment.
- The district court ruled that payments made directly to Isabell were garnishable, but payments made by the trustee for Isabell's benefit were not.
- The Wilcoxes (appellants) appealed to the Court of Appeals, challenging the ruling that protected payments made for Isabell's benefit.
- The Court of Appeals affirmed the district court's decision regarding payments for the beneficiary's benefit but also, on its own motion (sua sponte), reversed a separate continuing garnishment order.
- The Wilcoxes (petitioners) sought and were granted a petition for review by the Supreme Court of Kansas.
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Issue:
In the absence of a spendthrift clause, are payments made by a trustee of a discretionary trust for the benefit of a beneficiary subject to garnishment by the beneficiary's creditors?
Opinions:
Majority - McFarland, J.
Yes. In a discretionary trust without a spendthrift provision, payments made by a trustee on behalf of a beneficiary are subject to garnishment by the beneficiary's creditors. The court found no valid reason to distinguish between payments made directly to a beneficiary and payments made to third parties for the beneficiary's benefit, as doing so would only encourage circumvention of creditors' rights. The court adopted the rule articulated in the Restatement (Second) of Trusts § 155(2), which states that if a trustee, with knowledge of a creditor's claim, pays to or applies funds for the beneficiary, the trustee is liable to that creditor. To hold otherwise would allow a trustee to shield assets by simply paying a beneficiary's bills directly rather than providing cash, an outcome the court deemed arbitrary and contrary to public policy.
Analysis:
This decision aligns Kansas law with the modern majority rule articulated in the Restatement (Second) of Trusts. It closes a significant loophole that could have allowed beneficiaries of discretionary trusts to enjoy the trust's benefits while shielding assets from legitimate creditors. By refusing to distinguish between direct payments and payments 'on behalf of' the beneficiary, the court ensures that a trustee's exercise of discretion to distribute funds, in any form, subjects those funds to creditors' claims. This ruling makes it more difficult for debtors to use discretionary trusts without spendthrift clauses as a shield against their financial obligations.
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