The initial South Dakota statutes were similar to Alaska's in that the self-settled trust instrument must: (1) expressly incorporate South Dakota law to govern validity, construction, and administration of the trust; (2) be irrevocable; (3) contain a spendthrift clause; and (4) have assets that were not transferred with intent to hinder, delay, or defraud creditors.
(38) Since 1875, American courts have applied the maxim "cujus est dare, ejus est disponere," which means, "[wjhose it is to give, his it is to dispose." (39) Accordingly, spendthrift clauses are routinely used in the United States to protect a settlor's right to dispose of his or her assets.
Conversely, those in support of
spendthrift clauses argue that the settlor of a trust for the benefit of another should be able to attach to it such restrictions.(65) Moreover, they argue that spendthrift trusts are valuable in providing for and protecting unknowledgeable and incompetent beneficiaries.(66) Furthermore, proponents of these trusts maintain that the trusts do not have the effect of defrauding creditors because creditors can inquire into a beneficiary's source of income, get a credit report, or condition the giving of credit upon a statement of assets.(67)
The fact that
spendthrift clauses are unenforceable against these exception creditors means only that these creditors have remedies against a beneficiary's interest similar to those of creditors of beneficiaries with interests in a trust that does not include a spendthrift provision.
If there is no
spendthrift clause and the beneficiary transfers his discretionary interest, the trustee will be liable to a creditor for any distributions the trustee makes to the beneficiary after notice that the beneficial interest has been transferred to the creditor.
Second, because the new exemptions for retirement accounts are explicitly tied to their exemption from taxation, Patterson's distinction between retirement accounts in qualified plans that are covered by an ERISA
spendthrift clause and those that were not so covered are no longer analytically useful.
The essential elements are: 1) the trustee must be a Delaware resident, or an entity authorized by Delaware law to act as a trustee; 2) the Delaware trustee must maintain or arrange for custody in Delaware of at least some of the trust's assets; 3) the trust agreement must provide that Delaware law governs the validity, construction, and administration of the trust; 4) the trust must be irrevocable and contain a spendthrift clause; and 5) the settlor cannot retain the power to serve as trustee, or the power to direct distributions from the trust or to demand a return of assets transferred to the trust.
Bankruptcy Code, a spendthrift clause is enforceable if it is "enforceable under applicable non-bankruptcy law." In other words, if the assets of a trust are not subject to the claims of the settlor's creditors under state law, those assets will not be subject to the claims of creditors under federal bankruptcy laws.
Given this environment, it is likely that the courts in these states will continue to issue judgments that provide creditors access to the assets in out-of-state trusts, despite
spendthrift clauses (i.e., DAPT states must recognize other state's judgments under the Full Faith and Credit clause of the U.S.
Most states have statutes or judicial law that specifically permit "
spendthrift clauses" for annuity or life insurance settlement options.
