The U.S. Supreme Court’s Most Important Decision Affecting the Law of Trusts & Estates Was Decided a Very Long Time Ago

Posted on Categories Legal History, U.S. Supreme Court

[Editors’ note: This is the third in our series, What Is the Most Important U.S. Supreme Court Case in Your Area of the Law? The first two installments are here and here.]

The United States Supreme Court rarely addresses issues directly involving the law of wills and trusts.  Like most legal questions involving the transfer of private property between private citizens, such matters have usually been left to state courts.  Federal courts have even adopted special rules, like the so-called “probate exception to federal jurisdiction,” to keep wills- and trusts-related matters out of federal courts.  (This principle, described by Judge Richard Posner as “one of the most mysterious and esoteric branches of the law” prohibits federal courts from entertaining a suit that encroaches on the jurisdiction of state probate courts.)

Occasionally, a trusts and estates case reaches the Supreme Court because it involves an issue of an unconstitutionally discriminatory category or a question of federal preemption.  In ­­­­­­­­­­­Trimble v. Gordon, 430 U.S. 762 (1977), the Court declared invalid Illinois’ blanket ban on the fraternal inheritance rights of illegitimate children on equal protection grounds.  In the more recent case of Eglehoff v. Eglehoff, 532 U.S. 141 (2001), the Court ruled that on the question of the rights of a former spouse to her former husband’s ERISA-regulated pension plan, state laws automatically terminating the rights of the ex-spouse upon divorce were preempted by ERISA, which had no such provision.

However, most decisions of this sort have had very little practical impact on the operation of the rules that govern intergenerational wealth transfers. Trimble had relatively little impact on inheritance law generally, other than to expand one category of “heir.”  Similarly, Eglehoff has actually led to surprisingly little pre-emption, as lower federal courts have been regularly “discovering federal common law principles” that allow ERISA provisions to be interpreted in ways that line up perfectly with the state laws they supposedly supersede.

Cases involving the regulation of Native American property rights have raised the abstract question of whether the United States Constitution recognizes a citizen’s constitutional right to dispose of his or her property at death.  Although the Supreme Court reversed its earlier pronouncements and recognized such a right in Hodel v. Irving, 481 U.S. 704 (1987), the decision had no effect whatsoever on anyone other than the Native Americans subject to the Indian Land Consolidation Act of 1983 (which was at issue in the Hodel case).

To find a Supreme Court decision that significantly altered the course of the development of the law of trusts and estates, one arguably has to go back to 1875 and the case of Nichols v. Eaton, 91 U.S. 716 (1875).  That case recognized the legitimacy of the spendthrift trust and paved the way for its widespread acceptance as a legal means of protecting one’s beneficiaries from the meritorious claims of their creditors.

Under a spendthrift trust, the creator of the trust, the settlor, restricts the ability of the beneficiary of the trust to alienate his or her interest, either voluntarily or involuntarily.  This means that an impatient beneficiary cannot transfer his or her interest in the trust, which was likely to amount to a source of annual income, in exchange for a lump sum payment.  More importantly, it keeps the beneficiary’s creditors from attaching the income stream from the trust, as they could with wages under typical garnishment laws.

The idea that the beneficial interest of a trust could be made inalienable was a controversial suggestion in mid-19th century legal circles.  British courts categorically rejected the idea on public policy grounds.  (And they still do.)  John Chipman Gray, the great 19th-century Harvard law professor and treatise writer on property related topics, considered such an idea to be an injustice, and possibly an abomination.  In fact, Gray wrote his famous treatise on Restraints upon Alienation (1883) specifically to denounce the idea of the spendthrift trust.  Although a few states like New Jersey provided some limited spendthrift protections by statute, when such trusts began to appear after the Civil War, only the courts of Pennsylvania and Massachusetts were initially receptive to the general idea that they served a socially useful function.  Even in Massachusetts, the matter remained hotly contested until 1882, when the state’s Supreme Judicial Court issued its opinion in Broadway National Bank v. Adams.

However, in 1875, the United States Supreme Court weighed in favorably on the spendthrift trust in Nichols v. Eaton.  In a Rhode Island case that was in the federal system because of the diversity of citizenship of the parties, the court was required to interpret the legitimacy of a specially designed testamentary trust.  The trust in question provided a lifetime interest for the testator’s children but also provided limitations on the ability of creditors to reach the life interest.  In an opinion for a unanimous court, Justice Samuel Miller refused to invalidate the “sprendthrift” provisions.  While acknowledging that such a restraint would not be recognized by British courts, Miller was not persuaded that public policy dictated against such provisions.

Miller wrote, “[T]he doctrine that the owner of property, in the free exercise of his will in disposing of it, cannot so dispose of it, but that the object of his bounty, who parts with nothing in return, must hold it subject to the debts due his creditors, though that may soon deprive him of all the benefits sought to be conferred by the testator’s affection or generosity, is one which we are not prepared to announce as the doctrine of this Court.”

Although the use of the spendthrift trust did not increase dramatically in the immediate aftermath of Nichols v. Eaton, the decision proved to be a great source of legitimacy for the concept.  Over the course of the next twenty years more and more trusts were established with spendthrift clauses, and more and more state courts sanctioned their use.  By the 1890’s, even John Chipman Gray had to concede that the spendthrift trust was an accepted part of the legal landscape.  As he admitted in the second edition of Restraints upon Alienation in 1895, “State after State has given its adhesion to the new doctrine.”

The creditor-protection features of the spendthrift trust became a central feature of estate planning in the twentieth and twenty-first centuries.  Long ago, the debate over spendthrift trusts shifted away from their legitimacy to questions like whether there ought to be an exception to the spendthrift principle for claims of child support or compensation for personal injury.

Although the original rule was that a trust could be a spendthrift trust only if it contained express language to that effect, many states have now reversed that presumption.  In New York, for example, all trusts are presumed to be spendthrifts, unless the language creating them contains an expression to the contrary.  This approach appears to be will on its way to becoming the new majority rule, and reflects the triumph of Justice Miller’s views expressed in Nichols v. Eaton.

The Supreme Court of the United States did not create the idea of the spendthrift trust in 1875, but it did, for better or for worse, greatly facilitate its development.

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