Prohibited Trust Purposes

Terms:


Prohibited Trust purpose:
A trust may not be created for a purpose that is illegal or contrary to public policy.


Private trusts are typically created to secure the welfare of some person or class of people (e.g., spouse, children, grandchildren, etc.) This is a permissible purpose for the establishment of the trust.

A trust is prohibited from being created for an illegal purpose or one that is contrary to public policy. A common impermissible purpose is a trust created to defraud creditors. In this type of scheme, a settlor will transfer property to a trust for the purpose of hiding it from creditors. If the fraud is discovered, the trust is nullified, thereby allowing the creditors to reach the assets in the trust.

Other types of prohibited purposes often involve trusts created that are against public policy. For example, trusts that unreasonably restrain marriage by a beneficiary are invalid. Reasonableness is gauged by how long the restraint lasts and by the relationship between the settlor and the beneficiary.

EXAMPLE (1): Fabio established a trust for the benefit of his sister, Donatella, stating: “for Donatella as long as she remains single, but if she ever marries, to Dorian.” Here, this restriction would be unreasonable because Donatella would lose the money in the trust if she ever married.

EXAMPLE (2): Fabio established a trust for the benefit of his wife, Daniela, stating: “income for life to my wife, Daniela, but if Daniela remarries, income to my sister, Donatella.” Here, the restriction would be reasonable because if Fabio predeceased Daniela, it would make sense that Fabio would only want to provide support for Daniela during her widowhood.

In addition, trusts that encourage someone to get a divorce are also invalid. In contrast, to support public policy that favors marriage, courts have upheld conditions requiring that a beneficiary not divorce a spouse. See, e.g., In re Estate of Heller, 159 N.W.2d 82 (Wis. 1968).

As in the case of a court striking a provision that violates the Rule Against Perpetuities or not allowing the trust to fail for lack of a trustee by appointing another trustee, the consequences for a trust with an impermissible purpose are usually not that the whole trust is negated. Instead, the court will delete the illegal purpose or condition and enforce the trust without it, as long as this action does not thwart the settlor’s overall purpose for establishing the trust.

EXAMPLE: Minerva bequeaths money to KeyBank in trust to pay the income to Sally “provided Sally divorces her husband, Curtis.” Here, the condition seems to promote divorce; therefore, it would be invalid. Yet, the court could decide that Sally is entitled to receive the income free of the condition, if that was the settlor’s intention.