In the Matter of Frei Irrevocable Trust dated October 29, 1996, 390 P.3d 646, is a 2017 decision by the Supreme Court of Nevada holding that a beneficiary’s interest in a trust is subject to the claims of his creditors, notwithstanding a trust spendthrift clause, where the beneficiary had a full right of withdrawal with respect to his trust interest.
Because the right of withdrawal was created by a trust modification, the Court also had to determine whether the trust modification was valid under Nevada common law, since there was no Nevada trust modification statute in force at the relevant time.The trust in question was created by Mr. and Mrs. Emil Frei in 1996 for the benefit of their ten children equally, five children each from their respective prior marriages. After Mrs. Frei died, Emil Frei consented to the petition of his step-son, Stephen Brock, to modify the trust and grant each of the ten children an absolute right of withdrawal over his or her share of the trust. All of the trust beneficiaries were notified of the modification petition and none objected. Receiving no objections, the lower court granted Stephen’s petition to modify the trust. Both before and after this modification, the trust contained a spendthrift clause, prohibiting any voluntary or involuntary pledge or alienation of a beneficiary’s trust interest.
After the father, Emil, died in 2013, the other nine trust beneficiaries requested and received their full shares of the 1996 Trust. Only Stephen left his share intact in the trust. In the meantime, however, Stephen had settled litigation with Emil and his children over Stephen’s administration of another family trust. As part of that settlement, Stephen pledged his interest in the 1996 Trust as security for his payment obligation that amounted to a total of $415,000. Stephen only paid $5,000 of that total himself. To honor Stephen’s pledge, the trustee of the 1996 Trust then made three (3) $100,000 payments on the settlement from Stephen’s trust share. Stephen sued to prevent further settlement payments from the 1996 Trust, arguing that the spendthrift clause made his pledge invalid and also attacking the validity of the trust modification giving him the absolute power of withdrawal, a modification he himself had sought.
While Nevada had no statute governing the validity of trust modifications, the Court followed the Restatement (Second) of Trusts’ position that a trust can be modified even with less than all the settlors and beneficiaries consenting, so long as the modification of the trust does not prejudice the interests of the non-consenting beneficiaries. Here, the Court found that the modification had not prejudiced the other beneficiaries’ interests, and therefore was valid.
As for Stephen’s argument that the spendthrift clause prohibited him from pledging his interest in the 1996 Trust in the settlement of the litigation with Emil and his children, the Court found that the spendthrift protection was invalidated once Stephen had the right to withdraw his entire trust share. The Court cited a Colorado case for the proposition that the beneficiary does not actually need to exercise the right of distribution, only possess it, for the spendthrift protection to be invalidated.