464 B.R. 832
Bankr. W.D. Wis.2011Background
- Shirley McCoy created the McCoy Living Trust; Julie McCoy is a beneficiary and Kevin McCoy is the sole trustee.
- Trust article allows beneficiary to direct distributions to be retained in trust, with income paid to beneficiary and withdrawal rights in beneficiary’s direction.
- Amendment in 2002 adds Creditor Protection: all payments of income and principal are at the trustee’s sole discretion and not subject to creditor claims.
- Shirley McCoy dies in 2009; on Jan 1, 2010 Julie receives a $20,000 annual distribution 'free of trust.'
- Julie files Chapter 7 in 2010; trustee seeks turnover of trust distributions available to Julie, while Julie withholds distributions per the trustee’s discretion.
- Court analyzes whether the spendthrift clause prevents turnover under Wisconsin law and whether discretionary payments are 'due or payable' under Wis. Stat. § 701.06(2).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is Julie's trust interest property of the estate despite the spendthrift clause? | Distributions are due or payable under the trust terms and subject to turnover. | Spendthrift protection excludes Julie’s interest from the estate. | Debtor's interest is excluded; spendthrift enforceable. |
| Do discretionary distributions withheld by the trustee qualify as 'due or payable' under Wis. Stat. § 701.06(2)? | Discretionary distributions can be pursued once due or payable. | Withheld discretionary payments are not 'due or payable' until distributed. | Not due or payable; turnover denied. |
| Does the Creditor Protection provision override mandatory payment provisions in the trust? | Trust terms control; creditor protection does not defeat turnover. | Creditor Protection gives trustee sole discretion to withhold payments. | Creditor Protection provision governs; trustee may withhold. |
Key Cases Cited
- Magill v. Newman, 903 F.2d 1150 (7th Cir. 1990) (spendthrift clause excludes trust corpus from estate)
- In re Kedrowski, 284 B.R. 439 (Bankr. W.D. Wis. 2002) (state spendthrift protections; §541(c)(2) applicable)
- In re Mitchell, 423 B.R. 758 (Bankr. E.D. Wis. 2009) (state-law determination of estate interests; applicability of spendthrift)
- In re Bogue, 240 B.R. 742 (Bankr. E.D. Wis. 1999) (self-settled spendthrift protections)
- Welch v. Welch, 235 Wis. 282 (Wis. 1940) (trust construction aims to effect settlor's intent)