Violation of a Spendthrift Provision of a Trust in Arizona
Under Arizona law, a spendthrift provision in an estate planning trust prevents a credit from attaching a beneficiary’s interest. The provision also prevents the beneficiary from transferring his interest voluntarily. The purpose of such a provision is to prevent the beneficiary from either having a creditor take the beneficiary’s interest in the trust or selling that interest (“cashing in”) in payments to be received from the trust.
What happens if a beneficiary transfers his interest anyway? In the case, Weinstein v. Weinstein (In re Indenture of Trust Dated January 13) 326 P.3d 307 (2014), the Arizona Court of Appeals addressed this spendthrift trust issue.
Facts of the Case
In 1964, Mr. Weinstein and Mrs. Weinstein created an inter vivos trust. They named their son, B. Weinstein, trustee and his three children–S. Weinstein, C. Weinstein, and M. Weinstein, as beneficiaries. The Trust contained a spendthrift provision. This prohibited the voluntary and involuntary transfer of a beneficiary’s interest.
In 2000, M. Weinstein assigned his entire interest in the Trust to his siblings, S. Weinstein and C. Weinstein. It was to be held in trust for the benefit of their children. In return, B. Weinstein, as trustee, paid M. Weinstein $75,000 from the Trust.
B. Weinstein died in May of 2010 and the trust terminated. Two years later, M. Weinstein sued for an accounting of the trust. S. Weinstein and C. Weinstein argued that M. Weinstein could not ask for an accounting since he was no longer a beneficiary. They also argued that any claims M. Weinstein might make were time-barred by the statute of limitations and the equitable defense of laches (“waiting too long to assert the claim”).
The court granted S. Weinstein and C. Weinstein’s motion. It ruled that M. Weinstein’s assignment of his share of the trust was valid. It also ruled that he did not re-inherit an interest in the Trust through B. Weinstein’s will.
Finally, it ruled that even if the assignment was invalid, laches and the statute of limitations prohibited M. Weinstein’s claims. From these rulings, M. Weinstein appeals.
Assignment Was Invalid
In Arizona, a spendthrift provision in a trust is only valid if it restrains both voluntary and involuntary transfer of a beneficiary’s interest. Even if a trustee honors an assignment that violated a spendthrift clause, the beneficiary of a trust can stop all future payments under the assignment.
A valid spendthrift provision makes it impossible for a beneficiary to make a legally binding transfer. The spendthrift provision in the Weinstein trust was clearly intended to stop both voluntary and involuntary assignments. It is, therefore, a valid spendthrift clause.
As such, it prohibited any assignment of M. Weinstein’s beneficial interest in the Trust. The fact that M. Weinstein’s assignment transferred his interest to co-beneficiaries does not affect the spendthrift clause’s prohibition. Moreover, the assignment was not to M. Weinstein’s siblings, who were co-beneficiaries, but for the benefit of his siblings’ children.
Ratification of Agreement
S. Weinstein and C. Weinstein claim that, even if the assignment was invalid, M. Weinstein ratified the deal by accepting the $75,000. Under the Arizona Trust Code, a beneficiary can consent to conduct constituting a breach of trust. If he does so, knowing of his rights, the trustee is not liable to him.
The beneficiary can ratify the breach of the terms of the trust only if he has “full knowledge” of the act and its effects. A ratification will not be valid if it was induced by improper conduct of the trustee. In the context of a spendthrift trust, a beneficiary should not be allowed to consent to a breach of the spendthrift provision.
Still, sometimes it is unjust to hold the trustee liable for payments made even though they violated the spendthrift provision. In those cases, the trustee isn’t liable for distributions made under the assignment before the beneficiary invokes the spendthrift clause. The trustee isn’t liable to the beneficiary for payments made unless the assignment is revoked.
M. Weinstein argues that the trustee should have given him a copy of the Trust and an accounting. He claims he should have received these both before and after the assignment. However, a trustee is not liable for failing to provide trust documents to a beneficiary who repudiates all interest in the trust. M. Weinstein does not claim he ever requested a copy of the trust or an accounting of the trust assets.
The Trust here terminated upon B. Weinstein’s death in 2010. All trust property had been distributed. However, the record is unclear on when the distribution occurred. Any distribution of M. Weinstein’s beneficial interest in the trust that occurred after he revoked the assignment is invalid.
Since the Court could not determine this from the record, it could not uphold summary judgment on that basis.
Equitable Defense of Laches
Mr. Weinstein and Mrs. Weinstein argue that the appellate court should affirm the summary judgment on the basis of the doctrine of laches. They argue that laches bars any claims about the assignment. Laches is the equitable counterpart to the statute of limitations. It bars a claim when someone has unreasonably delayed bringing a claim.
Laches applies when the delay is unreasonable and results in prejudice to the opposing party. To determine whether the delay was unreasonable, courts must examine the justification for the delay. M. Weinstein petitioned for an accounting 12 years after his purported assignment. He brought it some two years after the death of the trustee, B. Weinstein. He argues this delay was not unreasonable because he was unaware assignment was prohibited.
He also claims he never received an accounting of the trust. Therefore, he couldn’t determine whether the $75,000 was a fair consideration. He also claims that B. Weinstein coerced him into signing the document. The Court noted that M. Weinstein may not have been aware of the trust’s spendthrift provision. However, he was aware of the other two reasons for the challenge in 2000. He knew when he made the assignment that B. Weinstein was coercing him.
He also knew he had not received an accounting. M. Weinstein offers no explanation for waiting 12 years to sue over the trustee’s failure to provide an accounting in 2000. This delay was unreasonable. For laches to apply, the unreasonable delay also must result in prejudice to the opposing party or the administration of justice.
During the 12 years, the trust was terminated, and its assets distributed. M. Weinstein’s beneficial interest was placed in a separate trust for the benefit of S. Weinstein and C. Weinstein’s children. Granting M. Weinstein’s requested relief involves reopening a terminated and distributed trust. The Court found that this would substantially prejudice S. Weinstein, C. Weinstein and the administration of justice.
Accordingly, the trial court did not abuse its discretion in finding M. Weinstein’s claim to set aside the assignment barred by laches. M. Weinstein cannot challenge the assignment. He has no interest in the Trust as a beneficiary based on the invalid assignment of his interest. Therefore, he does not have the standing to seek an accounting.
Power of Attorney
M. Weinstein argues that he reacquired an interest in the trust through B. Weinstein’s will. He signed a power of attorney (POA) in favor of B. Weinstein, as trustee of the trust, before his purported assignment. Therefore, he argues, his father got an interest in the trust.
Since M. Weinstein was a residuary beneficiary of B. Weinstein’s estate, he inherited some part of that interest. However, the POA signed by M. Weinstein only authorized B. Weinstein to conduct any business transaction on M. Weinstein’s behalf. Nothing in the document suggests it was specifically coupled with an interest in the trust. B. Weinstein did not receive an interest in the Trust through the POA. Consequently, M. Weinstein did not inherit any interest in the trust as a residuary beneficiary of B. Weinstein’s will.
The Court of Appeals affirmed the trial court’s ruling that M. Weinstein did not have the standing to seek an accounting from the trust.