What is the Fair Thing To Do?

This is a scenario I ran into somewhere on the Internet and I decided to share it for your consideration. I want to hear the kind of rule you’d make if it were up to you to decide what’s fair in this situation, with your reasons. You can drop the comments below.

I assume you know about trusts. There’s a kind of trust known as spendthrift trust. You can get an overview of them here. Basically, it’s a trust set up in such a way that the beneficiary receives payouts from the trust’s earnings or interest without being able to access the principal in any way because under the definition of the trust, it does not belong to her. In fact, in most cases, the beneficiary is only entitled to having whatever needs the payout covers taken care of, while the main trust has someone else entirely listed as it’s final inheritor. So, I can for instance, set up a trust that pays $100,000/year to my friend who is terrible at finances, thereby helping him take care of his needs, but the principal amount will go to my children once the term of the trust terminates, or if my friend dies. So while he’s getting the money annually, its not his money. Creditors can’t come for the money, the courts can’t, no one can, because it’s not his money (I feel like I’m repeating way too much, but i have to emphasize that).

The case of fairness comes in however when it becomes impossible to force proper retribution for an offense committed by the beneficiary (let’s call her Mary). Say, Mary goes out one day, gets way too drunk and drives right into Martha who because of the injuries becomes paralyzed and loses her daily livelihood. On top of that, she runs up medical bills, and a host of other expenses, including the cost of suing Mary for damages. However, Mary has no assets, no income and no way to pay the obligations to Martha. The only thing she has, is the money from the trust, which while it keeps her living in extreme comfort, is not available, not even a dollar to pay Martha. The reasoning is that, that money is essentially the property of whoever set up the trust, and while they are choosing to spend it on Mary, the courts or anyone else cannot force them to use it to settle Mary’s obligations to Martha. (This is a situation that comes up quite a few times in real life).

The question then becomes, should the rules of the trust be honored in this situation? Or should it be challenged or changed to force the money mary is getting to be used to pay her debts given that Martha is going to suffer for a long time for Mary’s negligence? By extension, some rules will have to be defined where certain types of creditors can come after spendthrift trust benefits, while other’s cannot. How is that bar determined?

What is the fair thing to do here? And why?

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5 Comments

  1. Lol. Isn’t this a no-brainer? The money is not Mary’s money and does not become so, until such a time as it has reached Mary. The trust itself is untouchable.

    The only walkaround I can think of is that, a lien can be placed on Mary’s bank accounts such that. What ever monies come in, are then diverted to paying Martha for Mary’s negligence.

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  2. That’s a good possible work around. My only problem is: isn’ t that still interfering with the execution of the trust funds? If Mary has no say over how it’s spent, then should we force it to be spent on her debt to Martha?

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  3. This is interesting.

    1. You say the Trust pays Mary the money annually. Once she gets paid, the money becomes hers. It’s like a gift. Once it leaves the benefactor’s possession, it becomes your property. Mary is thus under obligation to use the money to pay compensatory damages. If however she does not receive cash, and it is used to buy just assets (which she gets in her name), then the assets must be liquidated to pay damages. To clarify, when you say the money keeps her in extreme comfort, I’m assuming that the “extreme comfort” constitutes some physical assets (not just experiences- which I earnestly doubt that they can, alone, provide extreme comfort). If so, like I mentioned, they must be sold off for compensatory damages. If Martha comes into possession

    2. One could assume that there are punitive damages that are to be awarded to Martha. Punitive damages, if not paid, WILL deprive Mary of her extreme comfort- She could be sent to jail. So to keep in line with the intent of the trust-of making Mary extremely comfortable, the trust has to be used to pay Martha. This is not an obligation, of course, but it is the logical deduction should the benefactor want to keep the intent of his trust fund

    The above are ways in which the plaintiff gets her due, whilst working around the system. But I think a more interesting issue is if the benefactor is obligated to pay Martha. Can we successfully, to borrow a phrase from corporate law, pierce the Trust veil? I think in some cases, we can. And this ties up to my first point. If there are no legal demarcations between the beneficiary and the trustee (who is the legal owner of the trust) such that the benefactor is using trust funds in a purely personal capacity then there is a justification of piercing the trust veil.

    But enough of the legal gymnastics. Is it the right thing to do? Is it right to take money from the settler? It depends on your view. If you are a libertarian, then it is wrong, you cannot take someone else’s property. If you are a liberal, I think you may be able to wrest out a justification for forcibly taking someone’s property to do the most good. I would oscillate somewhere in the middle. Do not take the money from the trustee (or Settler), and give to Martha. But do not give the money to Mary either. If you want to give the money to Mary, you have to give it to Martha first, as Mary’s comfort can only be truly achieved if Martha is first satisfied.

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  4. The trick to this however, is that if I set out an iron clad rule forbidding the recipient of the annuity from a spendthrift fund I set up to use the money for ANYTHING other than what I stipulate (for instance, paying for his house, or food or car) then this can’t work. I am not his guardian and I am not obligated to pay his debts and any attempts to use my money to settle his credit obligations is illegal, even if my money is keeping him unfairly comfortable. And in a lot of this cases, civil ones especially, he’s not going to jail. It’s mostly fines or monetary compensation, and technically he has no money so no one can come for him.

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