IN RE: TOWNLEY BYPASS UNIFIED CREDIT TRUST.
Does a spendthrift provision in a trust preclude the remainder beneficiary from devising by a will his interest in the assets of the trust estate?
1. Facts and Background
W.D. Townley's will contained a trust leaving a life estate to Josie Townley, his wife. Upon her death, the trust was to terminate and the remainder of the assets was to be split between the two children, Billy Ray Townley and Jimmy LaRue Wilson. The will contained a spendthrift provision which prohibited any beneficiary from assigning or transferring any income or principal before receiving it. W.D. Townley's will made no provision if either child predeceased his or her mother, the very thing that occurred when Billy Ray died before his mother. Several years later when Josie died, it was uncontroverted the daughter, Jimmy LaRue Wilson, was entitled to one half of the estate, but since Billy Ray predeceased his mother, the trial court was requested to determine how the other one half was to be distributed. The trial court determined that the son's one-half interest was vested and thus transferred through his will to his widow rather than by intestacy. We will affirm the judgment of the trial court.
2. Standard of Review
The construction of a written instrument is a question of law for the court, and we are to review such de novo. MCI Telecomm. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 650-51 (Tex.1999). Here, the facts are not in dispute, but only the application of the law to those facts.
3. Is This a Vested Remainder Interest?
Typically, a remainder interest occurs when a possessory interest in property (often a life estate) is given to one person, with a subsequent taking of the estate in another person. Here, the trust document created the trust for the benefit of the mother, with all income, and potentially all corpus, to be utilized for her benefit as determined to be appropriate by the trustee. Upon the mother's death, the trust terminated and directed that the corpus then be distributed to the son and daughter.1
If a remainder interest is in an ascertainable person, and no condition precedent exists other than the termination of prior estates, then it is a vested remainder. “Texas courts will not construe a remainder as contingent when it can reasonably be taken as vested.” McGill v. Johnson, 799 S.W.2d 673, 675 (Tex.1990); see also Pickering v. Miles, 477 S.W.2d 267, 270 (Tex.1972).
It is settled that a remainder is vested when there is a person in being at the creation of the interest who would have a right to immediate possession upon termination of the intermediate estate. Chadwick v. Bristow, 146 Tex. 481, 208 S.W.2d 888, 891 (1948); Bradford v. Rain, 562 S.W.2d 514, 518 (Tex.Civ.App.-Texarkana 1978, no writ); Reilly v. Huff, 335 S.W.2d 275, 278 (Tex.Civ.App.-San Antonio 1960, no writ). In this case, the son met this criteria, and his remainder interest can reasonably be taken as vested. In fact, there is no substantial basis in the record for any other conclusion. See Shearrer v. Holley, 952 S.W.2d 74, 79 (Tex.App.-San Antonio 1997, no writ).
It is argued that, because the amount that might ultimately pass by the remainder interest was uncertain, it could not vest. There is no authority provided supporting that position, and a number of the cases cited above involve similar facts-a life estate, with remainder interest to another. The fact that the estate might, in part or whole, be consumed, is not a factor. In Bradford, this Court held explicitly that the character of a remainder as vested is not affected by an uncertainty as to the question of a quantum which will be received by the remainderman when he or she becomes entitled to possession. Bradford, 562 S.W.2d at 518.
The remainder interest was vested. Under normal circumstances, then, it could be transferred from its owner to another person.
4. The Spendthrift Provision
At trial, and now on appeal, the focus by the parties and the trial court was on the proper application of a spendthrift clause within the bypass trust. The clause reads as follows:
(E) Spendthrift Clause. No Beneficiary of the trust shall have the right or power to anticipate by assignment or otherwise any income or principal given to such beneficiary of this Trust Agreement, or in advance of actually receiving the same, have the right or power to sell, transfer, encumber or in anywise charge same; nor shall such income or principal, or any portion of same, be subject to any execution, garnishment, attachment or legal sequestration, levy or sale, or in any event or manner be applicable or subject, voluntarily or involuntarily to the payment of such Beneficiary's debts.2
As previously noted, under general rules of law, Texas favors a construction that allows vesting at the earliest possible time. See McGill, 799 S.W.2d at 675; Chadwick, 208 S.W.2d at 891. Such a construction has been uniformly held to be in the public interest because it provides for a more complete disposition of property interests and provides for greater legal effectiveness. See Rust v. Rust, 147 Tex. 181, 211 S.W.2d 262, 266 (1948), aff'd, 147 Tex. 181, 214 S.W.2d 462 (1948); Chadwick, 208 S.W.2d at 891.
We agree with the trial court that an interest had vested in the son before his death. However, at the time of that vesting, the only interest was, at best, an expectancy that might or might not ripen into the right of possession of anything at all, as the corpus could have been consumed by the trust for the mother's benefit before he had any right to actually receive under the trust terms.3
Under the Texas Trust Act, a “beneficiary” includes, in the case of a decedent's estate, an heir, legatee, and devisee and, in the case of a trust, an income beneficiary and a remainder beneficiary. Tex. Prop.Code Ann. § 116.002(2) (Vernon Supp.2007). A remainder beneficiary is later defined as a “person entitled to receive principal when an income interest ends.” Tex. Prop.Code Ann. § 116.002(11) (Vernon Supp.2007). The more general definition is found in Section 111.004(2) of the Texas Property Code, which states broadly that a beneficiary is a person for whose benefit property is held in trust, regardless of the nature of the interest. Tex. Prop.Code Ann. § 111.004(2) (Vernon Supp.2007). Under either of these definitions, the son was a beneficiary of the trust, and it appears that he also qualified as a remainder beneficiary under the statute.
Under the express terms of the testamentary bypass trust, after the mother died, the trust terminated, with directions to the trustee to distribute the corpus to the son and daughter. Thus, the corpus became part of the son's estate upon the mother's death. The question is then, was the corpus to be distributed under the terms of his will, or does the spendthrift provision require distribution under the laws of intestacy?
The language of the spendthrift provision states that the beneficiary had no right or power to “anticipate” any principal given under the trust agreement or, in advance of actually receiving it, have the right or power to transfer any principal given under the trust agreement. The clause prevents creditors from reaching the trust.
Appellant argues that the son's will leaving his property to his wife is necessarily a transfer and falls within the spendthrift trust's restriction. Consequently, it is argued the trial court erred in determining that the son's remainder interest passed to his devisee, his widow. Neither of the parties has cited any Texas precedent on this issue, and we have found none. Therefore, we turn to other sources for guidance.
Some analogous situations are helpful. In the case of In re Estate of Campbell, 48 Haw. 1, 394 P.2d 784 (1964), a somewhat similar situation was presented. The issue there was whether a deceased beneficiary could leave income that had accumulated, but not distributed, before death to a devisee by will even though the trust included a spendthrift provision. The spendthrift provision of the trust stated that all payments “shall be valid and effectual only when made to the beneficiary, devisee or legatee, in person, to whom the same shall appertain and belong, and upon his or her individual receipt.” Welsh v. Campbell, 42 Haw. 490, 495 (Haw.1958).
The court stated, “The purpose of the inclusion of the spendthrift clause in the will was to protect an improvident beneficiary against his own folly by insulating him against overreaching creditors. It does not evidence intent to restrict the amount of income for a beneficiary's maintenance.” Id. (citing Cromwell v. Converse, 108 Conn. 412, 143 A. 416 (1928)). “The spendthrift provisions should not be taken to cut off benefits which would in the absence of such provisions be conferred by the will.” Id. Further, the Hawaii court quoted from a second edition of Scott's treatise on trusts. The same provision of that treatise is now found at IIA Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts § 158.1 (4th ed.1987):
Where the income of a trust estate is payable to a beneficiary and he dies, his personal representatives are entitled to the income that has accrued at the time of his death and that has not been paid to him, unless it is otherwise provided by the terms of the trust. Even though it is provided by the terms of the trust or by statute that the interest of the beneficiary shall not be transferable by him or subject to the claims of his creditors, the beneficiary's interest in such accrued income passes on his death to his personal representatives, if it would so pass in the absence of such a restraint on alienation. The purpose of the restraint on alienation is to protect the beneficiary, and when he dies he no longer needs such protection. The purpose is not to deprive the beneficiary's estate of the income which was payable to him but that had not been paid at the time of his death. Whatever is thus received by the personal representatives is a part of his estate and is subject to the claims of his creditors. Unless the claims of creditors preclude it, the beneficiary can dispose by will of his right to the income accruing up to the time of his death.
Id. (footnote omitted).
Appellant cites Cowdery v. Northern Trust Co., 321 Ill.App. 243, 53 N.E.2d 43 (Ill.App.Ct.1944). In that case, the spendthrift trust directed that the beneficiary was to have no control of any of the trust's income “until after actual receipt thereof by such actual beneficiary.” Once again, the issue of distribution of income that had accumulated during the beneficiary's lifetime, but had not been distributed before death, was before the court. The Illinois court held that the spendthrift provision precluded the distribution of the income to the beneficiary's estate:
Whatever may be the purpose, generally, of restraint on alienation in spendthrift trusts, the terms used in the trust herein involved go further than mere protection of the beneficiary during his lifetime. They exclude control of such income by any beneficiary until same is actually received by the actual beneficiary, not his or her representative, and bar claims of creditors after, as well as before, the death of beneficiaries.
This discussion, while relevant, is not directly on point since it involves income accumulated, but not distributed, before the beneficiary's death, rather than property received after the beneficiary's death.
The Restatement of Trusts also has some discussion of this topic. In general comment (g) of Section 58(2) of the Restatement (Third) of Trusts it is stated that, on the death of the beneficiary of a spendthrift trust, his or her executor or administrator is entitled to accrued income. Further, in the reporter's notes to that general comment to that subsection, Scott's treatise is cited for the proposition that interests, other than accrued income, may pass by will of the beneficiary despite the spendthrift trust provision.
‘[S]pendthrift trusts are upheld on the ground that it is not against public policy to permit the settlor in creating the trust to protect the beneficiary against his own improvidence. When the beneficiary dies, the need for such protection ceases. There would seem no reason, therefore, why on his death his creditors should not be able to reach his interest under the trust if his interest has not ceased on his death.’ A continuing income or remainder interest in the trust, despite the spendthrift provision, is transferable by will or intestacy for the same reason, and also because the right to pass the continuing interest on to others is a natural feature of such an interest as it was given to the beneficiary by the settlor.
Restatement (Third) of Trusts § 58 reporter's notes, cmt. g (2003) (emphasis added).
Unlike the other authorities cited, the Restatement appears to address not only income that was accumulated during the lifetime of the beneficiary, but also a remainder interest in the trust.
We recognize that these are not controlling authorities, but, having found none, we will follow the logic and reasoning of the Restatement. We agree that the purpose of the spendthrift provision is to protect the beneficiary from his or her own folly, a purpose that cannot be promoted after the beneficiary's death. Further, Texas law recognizes that a person of sound mind has a perfect legal right to dispose of his or her property as that person wishes. Rothermel v. Duncan, 369 S.W.2d 917, 923 (Tex.1963).
For the reasons stated, we affirm the judgment of the trial court.
1. We note that other terms describing the son's interest would be more traditionally correct, such as secondary beneficiary, or a tertiary beneficiary. However, the current version of the Texas Trust Code identifies such as a “remainder beneficiary,” and we will utilize that terminology from this point forward.
2. Section 112.035(1) of the Texas Property Code states that spendthrift provisions in trusts are lawful, providing that a settlor may provide a term stating that the interest of a beneficiary in income or principal “may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.” Tex. Prop.Code Ann. § 112.035(1) (Vernon Supp.2007).
3. Restatement (Third) of Trusts § 49 (2003) states that, except as limited by law or public policy, the extent of the interest of a trust beneficiary depends upon the intention manifested by the settlor.
Opinion by Justice CARTER.