I’ve been perusing some old New York trusts and estates case law. It’s fascinating to read a good summary of an antiquated rule and to examine the origins of current rules.
For example, in Schenck v. Barnes, 25 A.D. 153, 49 N.Y.S. 222 (1898), the New York Appellate Division (Second Department) gives a good summary of the common law rule that allowed creditors to reach a trust beneficiary’s present interest:
In England, for a long period, the law has been settled that the interest or income of the equitable life tenant (with the single exception of a trust for a married woman) is alienable by the beneficiary, passes to an assignee in bankruptcy, and is at all times subject to the claims of creditors. Nor will any provision in the trust deed that the income shall be inalienable or shall not be anticipated be effective. The trust deed may provide that on the bankruptcy or alienation of the first beneficiary, the interest of that beneficiary shall cease, and the income thereafter go to another person. But as long as the income is payable to any particular beneficiary, it is not possible to withdraw it from satisfaction of the debts of such person. (Perry on Trusts, §§ 386-388.) The question now before us could, therefore, not arise in that country. The English rule prevailed in this State until the enactment of the Revised Statutes. It was also adopted for a time in most of the other States, but of late, in a majority of the States and in the courts of the United States, the English rule does not obtain, and this in most cases without any statutory enactment abrogating it.
In Schenck v. Barnes, 156 N.Y. 316 (1898), the New York Court of Appeals gave a more concise summary of the common law rule:
While it is true that in this and other states the English rule has been modified, which makes the interest of a beneficiary under a trust created for his benefit by a third party, subject to the claims of his creditors, yet we have not ignored the general policy of the law that creditors shall have the right to resort to all the property of the debtor not protected by statute.
In this case, the New York Court of Appeals affirmed the Second Department’s decision. It seems that if the Court of Appeals had ruled differently, New York would have allowed creditor protection for self-settled trusts.
(I pulled these cases from 1898 not for the summary of a common law rule, but to examine why New York doesn’t allow domestic asset protection trusts, as Nevada, Delaware, and an increasing number of states do. But having come across a good summary of a common law rule, I thought it would be prudent to make note of it somewhere.)