By Max Roseman, Esq., Contract Partner, The Law Office of Barry E. Janay, P.C.
The Law Office of Barry E. Janay, P.C. serves clients throughout New York and New Jersey, providing strategic counsel on trust and estate matters. This article provides general information and does not constitute legal advice; a specific consultation is necessary to address individual circumstances.
Executive Summary For Creditors
Judgment creditors often face significant hurdles when a debtor’s assets are held in a New York trust. The general rule is that assets in a properly structured third-party “spendthrift” trust are heavily shielded from creditors until distributed to the beneficiary. You generally cannot compel a trustee to invade the principal to satisfy your judgment.
However, this protection is not absolute. The most significant exception applies to “self-settled” trusts, where the debtor created the trust for their own benefit. These are generally void as against creditors. Other potential avenues for recovery include reaching income that exceeds the beneficiary’s support needs, challenging fraudulent transfers into the trust, or capitalizing on trustee misconduct. Successfully navigating these rules requires a precise diagnosis of the trust structure and a targeted enforcement strategy.
Legal Framework: Trustee Duties And Standing
Under New York law, a trustee’s obligations are among the most stringent in the legal field. In New York Credit Men’s Adjustment Bureau, Inc. v. Weiss, the Court of Appeals affirmed the “uncompromising rigidity” with which courts enforce a fiduciary’s duty of undivided loyalty. This duty flows exclusively to the trust’s beneficiaries and to the preservation of the trust corpus, not to the beneficiaries’ creditors. A trustee must act with the highest degree of fidelity and is prohibited from self-dealing or placing their own interests in conflict with those of the beneficiaries.
This primary duty is codified and expanded in the Prudent Investor Act, New York Estates, Powers and Trusts Law (EPTL) § 11-2.3, which mandates that a trustee “exercise reasonable care, skill and caution” in managing trust assets. This includes diversifying investments, considering tax consequences, and balancing the interests of current income beneficiaries and future remaindermen. The standard is one of prudence and process, not investment performance; a trustee is not liable for mere errors in judgment or market losses if their conduct was prudent at the time of the decision.
For creditors, this framework means the trustee is not an ally and owes you no fiduciary duty. However, a trustee’s failure to meet these standards can create an indirect opening. If a trustee wastes assets, engages in self-dealing, or otherwise breaches their duties, beneficiaries may bring an action to surcharge the trustee for losses or seek their removal. Such actions can restore value to the trust, thereby replenishing the pool of assets from which a creditor might eventually recover.
Statutory Protection of Trusts And Spendthrift Provisions
New York’s statutory scheme creates a formidable shield for assets held in third-party trusts, while leaving self-settled trusts highly exposed. The framework rests on several key provisions of the Estates, Powers and Trusts Law (EPTL) and the Civil Practice Law and Rules (CPLR).
The cornerstone of protection for trusts created by someone other than the debtor-beneficiary is New York’s “spendthrift” rule, codified in EPTL § 7-1.5. This statute makes a beneficiary’s right to receive income from a trust inalienable, meaning it cannot be voluntarily assigned by the beneficiary or involuntarily seized by creditors. This protection is automatic unless the trust instrument expressly grants the beneficiary the power to transfer their income interest. While exceptions exist for dependents the beneficiary is legally obligated to support, this general inalienability is the primary reason creditors find it difficult to attach a beneficiary’s income stream before it is paid out.
This protection is complemented by CPLR Article 52, which governs the enforcement of money judgments. While various enforcement devices exist, the CPLR recognizes the special status of trust property. Historically, this meant that the corpus of a third-party spendthrift trust was generally unreachable by creditors through standard execution procedures.
However, the statutory protections have critical limits. The most significant is for self-settled trusts. Under EPTL § 7-3.1, a disposition in trust for the use of the creator is void as against the creator’s existing or subsequent creditors. This prevents a debtor from using a trust to shield their own assets from their own creditors while retaining the beneficial enjoyment.
Furthermore, even with third-party trusts, creditors are not entirely without recourse. EPTL § 7-3.4 provides that any income from a trust in excess of the amount necessary for the beneficiary’s education and support is liable to the claims of creditors. This “surplus income” exception requires a specific court action to determine what amount is reasonably necessary for the beneficiary’s station in life, with anything above that amount becoming available for garnishment.
Key Case Law And Doctrinal Examples
The statutory framework governing creditor rights is animated by a rich body of case law that defines the practical boundaries of trust protection and trustee duties.
Self-Settled Trusts Offer No Shield
New York courts have long held that one cannot use a trust to protect assets from one’s own creditors. The foundational case of Schenck v. Barnes, 156 N.Y. 316 (1898), established that a debtor who creates a trust for their own benefit cannot shield their reserved interest from subsequent creditors. The Court of Appeals reasoned that such an arrangement is against public policy, as it would allow individuals to secure a comfortable support for life, free from the claims of future creditors, regardless of their subsequent business losses or liabilities. In such cases, the creator’s entire reserved interest is a fund to which creditors can resort, a principle now enshrined in EPTL § 7-3.1.
The Strength and Limits of Spendthrift Protection
For trusts created by third parties, the spendthrift protection is robust, but not absolute. In Brearley School v. Ward, 201 N.Y. 358 (1911), the Court of Appeals held that spendthrift protections are statutory exemptions, not inviolable contract rights. Therefore, the legislature could constitutionally amend the law to allow creditors to reach 10% of trust income, even for trusts created before the amendment. However, creditors seeking to reach “surplus” income beyond the 10% statutory garnishment face procedural hurdles. As clarified in Matter of Kaplan v. Peyser, 273 N.Y. 147 (1937), a creditor must bring a separate plenary action to determine the amount of surplus income available, rather than using summary enforcement proceedings.
The Prudent Investor Standard in Practice
A trustee’s primary duty is to the beneficiaries, and their investment decisions are judged by a standard of prudence, not performance. In In re the Judicial Settlement of the Final Account of JPMorgan Chase Bank N.A. (Gill), 996 N.Y.S.2d 816 (App. Div. 2014), the court held that allegations of underperformance are insufficient to state a claim for breach of fiduciary duty. A fiduciary’s conduct is not judged by hindsight. Similarly, in In re Lekki, 216 N.Y.S.3d 396 (App. Div. 2024), the court found it was prudent for a trustee to continue the settlor’s own investment strategy, which included holding a significant portion of assets in an interest-bearing savings account, given the circumstances.
Enforcement Mechanisms within CPLR Article 52
While creditors face restrictions, CPLR Article 52 provides the procedural toolkit for enforcement. In Cruz v. TD Bank, N.A., 979 N.Y.S.2d 257 (2013), the Court of Appeals clarified that while a judgment debtor cannot bring a new type of plenary action for damages against a garnishee bank for an improper restraint, the CPLR itself provides remedies. Specifically, CPLR 5239 and 5240 allow any “interested person” to commence a special proceeding to determine rights in property, obtain the release of improperly restrained funds, or seek other equitable relief from the court overseeing the enforcement of the judgment. This confirms that the courts are the proper venue for resolving disputes between creditors, debtors, and garnishees over trust assets.
Principal Exceptions And Attack Vectors For Creditors
While New York law provides substantial protection for third-party trusts, these shields are not invulnerable. Creditors may exploit several statutory exceptions and equitable doctrines to reach assets that appear to be beyond their grasp.
Self-Settled Trusts: The Primary Opening
The most direct path for a creditor is against a self-settled trust. New York Estates, Powers and Trusts Law (EPTL) § 7-3.1(a) unequivocally states that a “disposition in trust for the use of the creator is void as against the existing or subsequent creditors of the creator.” This long-standing public policy prevents individuals from placing their own assets into a trust for their own benefit to serve as a “refuge from his creditors,” as established in the seminal case Schenck v. Barnes, 156 N.Y. 316 (1898). Consequently, a creditor can reach the maximum amount that the trustee could, in their discretion, pay to the settlor-beneficiary. This includes not only income but also any principal that the trustee is authorized to invade for the creator’s benefit.
Surplus Income and Necessaries
For third-party spendthrift trusts, creditors have two primary avenues to access the income stream. First, under what is known as an income execution, a judgment creditor can obtain a court order to levy 10% of the income payments due to the beneficiary, provided the payments meet the statutory threshold. Second, and more powerfully, EPTL § 7-3.4 permits a creditor to commence a separate court action to reach all trust income “in excess of the sum necessary for the education and support of the beneficiary.” This requires a fact-intensive inquiry into the beneficiary’s lifestyle and needs, but it allows access to funds beyond the standard 10% garnishment. Additionally, a beneficiary’s interest may be reached in an action for necessaries, and beneficiaries may voluntarily assign income to satisfy legal support obligations for family members.
Voidable Transactions (Fraudulent Conveyances)
A creditor can challenge the funding of a trust itself by asserting that the transfer of assets into the trust constituted a voidable transaction under New York’s Debtor and Creditor Law. Even if a trust is structured as a third-party spendthrift trust, if the assets were transferred to it by the debtor with the actual intent to hinder, delay, or defraud creditors, or if the transfer was made without fair consideration and rendered the debtor insolvent, the transfer can be unwound. Success depends on demonstrating factors related to the debtor’s financial state at the time of the transfer and the circumstances surrounding it.
Trustee Misconduct or Waste of Assets
Although a trustee’s duties are owed to the beneficiaries, a creditor may benefit from a trustee’s malfeasance. If a trustee improperly depletes trust assets through negligence, self-dealing, or other breaches of fiduciary duty, they may be subject to a surcharge action to restore the lost funds to the trust. As the court made clear in New York Credit Men’s Adjustment Bureau, Inc. v. Weiss, fiduciaries who waste assets can be held accountable for the resulting loss. A creditor may not have direct standing to sue for such a breach, but they can use evidence of misconduct to pressure beneficiaries to act or to support other claims, such as alleging the trust is a sham. In some instances where a trustee knowingly accepts stolen or fraudulently obtained funds, the trust estate itself may be liable for unjust enrichment.
Practical Enforcement Tools And Litigation Strategies
Successful collection against trust assets requires a proactive and strategic approach using the tools provided by New York’s Civil Practice Law and Rules (CPLR) and substantive trust law.
Post-Judgment Discovery
The first step is gathering intelligence. A judgment creditor can serve information subpoenas and deposition notices on both the judgment debtor and the trustee. This discovery can compel the production of the trust instrument, account statements, records of distributions, and communications between the trustee and beneficiary. This information is critical for diagnosing the trust type, identifying assets, and uncovering potential vulnerabilities, such as discretionary distribution standards or evidence of trustee misconduct.
Special Proceedings and Turnover Motions
CPLR Article 52 provides powerful enforcement mechanisms. As affirmed in Cruz v. TD Bank, N.A., CPLR 5239 and 5240 authorize any “interested person,” including a judgment creditor, to commence a special proceeding to determine rights in property or to obtain a court order modifying an enforcement procedure. This is the proper forum for resolving disputes with a trustee over the status of trust assets. If discovery reveals that funds are due to be distributed or that assets are otherwise reachable (e.g., in a self-settled trust), a creditor can file a turnover motion under CPLR 5225 or 5227. This asks the court to order the trustee to pay money or deliver property directly to the creditor to satisfy the judgment.
Commencing Plenary Actions
For more complex attacks, a plenary action may be necessary. This is required to: – Reach Surplus Income: An action must be brought to determine what portion of a beneficiary’s income under a third-party trust is surplus and thus available to creditors pursuant to EPTL § 7-3.4. – Set Aside Fraudulent Conveyances: A creditor must file a separate lawsuit to challenge transfers into a trust as voidable transactions under the Debtor and Creditor Law. – Pierce Sham Structures: If evidence suggests the trust is merely an alter ego of the debtor, a creditor can seek a declaratory judgment to disregard the trust structure entirely.
Actions Involving the Trustee
Where a trustee has breached their duties, causing a loss to the trust, a creditor’s strategy may involve pressuring a beneficiary to commence a proceeding for an accounting or for the trustee’s removal under EPTL § 7-2.6. While a creditor’s standing to bring such a proceeding directly is limited, evidence of a trustee’s imprudence or disloyalty can be a powerful lever in settlement negotiations or in support of other claims. In egregious cases, joining the trustee as a defendant in a fraudulent conveyance action may be appropriate.
Defensive Options For Trustees And Beneficiaries
When a creditor targets a trust, trustees and beneficiaries are not without powerful defenses. A proactive and well-documented approach is critical to preserving the trust’s assets and integrity.
The first line of defense is meticulous administration. Trustees must maintain detailed records of all decisions, particularly regarding distributions and investments, to demonstrate their independence and adherence to the trust’s terms. This documentation is essential for proving compliance with the Prudent Investor Act. As seen in cases like In re Lekki and In re the Judicial Settlement of the Final Account of JPMorgan Chase Bank N.A., courts focus on the prudence of the trustee’s process at the time decisions were made, not on the investment’s ultimate success or failure. Demonstrating a reasoned investment strategy is paramount.
When facing litigation, trustees should assert New York’s strong statutory protections. The spendthrift provision of EPTL § 7-1.5 is a primary shield against attempts to seize a beneficiary’s income interest. Trustees can respond to creditor actions by filing motions to dismiss or for protective orders to quash overly broad discovery requests that infringe upon the trust’s administration.
For significant or contentious decisions, such as selling a major asset or making a large discretionary distribution, a trustee may seek court approval through an accounting or an advice-and-direction proceeding. Obtaining a court order insulates the trustee from later claims of breach of duty by either beneficiaries or creditors. Finally, where a creditor’s claim has some merit, such as a claim for surplus income, negotiation and settlement may be a more cost-effective strategy than prolonged and expensive litigation.
Multistate, Bankruptcy, And Related Law Considerations
The intersection of trust law with bankruptcy and multistate planning adds layers of complexity to a creditor’s collection efforts.
In bankruptcy, the U.S. Bankruptcy Code generally respects state law property rights, including New York’s spendthrift trust protections. An interest in a third-party spendthrift trust is typically excluded from the debtor-beneficiary’s bankruptcy estate. However, any income or principal that has been distributed or is subject to a mandatory payment may become property of the estate.
The rules are entirely different for self-settled trusts. Consistent with EPTL § 7-3.1, assets in a trust created by the debtor for their own benefit are not protected from the debtor’s creditors and are therefore accessible to the bankruptcy trustee. The bankruptcy trustee effectively steps into the shoes of a judgment creditor and can use all available remedies, including actions to void the trust as against creditors. It is important to note that EPTL § 7-3.1(b) provides specific exemptions for certain retirement accounts, such as IRAs and qualified corporate plans, which are conclusively presumed to be spendthrift trusts.
Multistate issues frequently arise when a trust is governed by the laws of one state but has trustees, beneficiaries, or assets in another. A trust instrument’s choice-of-law clause is generally respected, but a New York court may still apply New York public policy, particularly in cases involving self-settled trusts or fraudulent conveyances. A creditor with a New York judgment may need to domesticate that judgment in the state where the trust is administered to enforce it against the trustee, creating additional procedural hurdles.
Client Engagement: Services The Firm Provides And Next Steps
The Law Office of Barry E. Janay, P.C., working with contract partner Max Roseman, Esq., provides sophisticated counsel to clients on all sides of trust-related disputes. Our practice is built on a deep understanding of how trusts are designed for asset protection and how they can be lawfully challenged.
For judgment creditors, our services include: * Trust Vulnerability Assessment: Analyzing trust documents to identify weaknesses under EPTL §§ 7-3.1, 7-3.4, and other relevant statutes. * Litigation and Enforcement Strategy: Developing and executing plans to reach self-settled interests, surplus income, and fraudulently transferred assets through discovery, turnover motions, and plenary actions. * Multistate and Bankruptcy Coordination: Managing cross-border enforcement efforts and collaborating with bankruptcy counsel to maximize recovery from debtor-beneficiaries.
For trustees and beneficiaries, we provide: * Fiduciary Guidance and Risk Mitigation: Advising on compliance with the Prudent Investor Act and other fiduciary duties to withstand creditor scrutiny. * Defensive Litigation: Vigorously defending the integrity of properly structured trusts against creditor attacks. * Court Proceedings and Restructuring: Assisting with judicial accountings, seeking court approval for critical transactions, and advising on trust modifications or decanting where appropriate.
If you are a creditor, trustee, or beneficiary facing a dispute over trust assets, we are prepared to deliver strategic, results-oriented representation.
Contact The Law Office of Barry E. Janay, P.C. for a confidential consultation to understand your rights and strategic options in New York and New Jersey. This article is for informational purposes only and does not create an attorney-client relationship.
