## Facts

- Jane McLean Brown inherited approximately $250,000 in 1993 and, due to chronic alcoholism, sought to protect the funds from her own improvidence.
- Brown created and funded an irrevocable charitable remainder unitrust agreement (ICRUA) with the inherited assets.
- The ICRUA entitled Brown to annual payments equal to 7% of the trust’s net value (valued at the start of each tax year), paid monthly.
- Brown was the sole current income beneficiary and lived on the monthly unitrust payments.
- Brown served as trustee, with authority largely limited to directing investments; she lacked power to invade principal or change the payout amount.
- The trust included a spendthrift clause purporting to bar beneficiaries’ creditors from reaching amounts payable to beneficiaries.
- After Brown filed Chapter 7, she asserted her beneficial interest was excluded from the bankruptcy estate under the spendthrift provision or, alternatively, protected as a support trust.
- The Chapter 7 trustee, Deborah Menotte, argued the trust was self-settled and the spendthrift clause was ineffective against Brown’s creditors.

## Issues

1. Whether a debtor’s beneficial income interest in a self-settled charitable remainder unitrust is excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2) based on a spendthrift clause enforceable under applicable trust law.
2. Whether the unitrust could be treated as a support trust that shields the debtor’s income interest from creditors.
3. Whether, even if the debtor’s income interest is included in the estate, the trust corpus (committed to nondebtor remainder beneficiaries and ultimately to charity) is reachable by the bankruptcy estate.

## Decision

- The Eleventh Circuit reversed the lower courts insofar as they excluded Brown’s income interest from the bankruptcy estate.
- The court held Brown’s right to receive the 7% annual income stream is property of the estate and may be reached by the Chapter 7 trustee.
- The court held the trust corpus was not subject to creditors’ claims in the bankruptcy because Brown lacked any right to invade principal and remainder interests belonged to others.
- The case was remanded for further proceedings consistent with these holdings.

## Legal Principles

- Under 11 U.S.C. § 541(a), the bankruptcy estate includes the debtor’s legal and equitable interests at filing, subject to limited exclusions.
- Section 541(c)(2) excludes a beneficial interest in a trust only when the restriction on transfer is enforceable under applicable nonbankruptcy law.
- Spendthrift restrictions in a self-settled trust are not enforceable against the settlor-beneficiary’s creditors under traditional trust law principles as applied by the court; therefore, such restrictions do not trigger § 541(c)(2) exclusion for the settlor-beneficiary’s interest.
- A debtor cannot immunize a retained beneficial interest from creditors by placing her own assets in trust for her own benefit and adding a spendthrift clause.
- Labeling a self-settled fixed-payment unitrust as a “support trust” does not protect the settlor-beneficiary’s income interest from creditors where the arrangement is not a third-party support trust and distributions are not limited by discretionary support standards.
- Where the debtor has no power to access principal and remainder interests are irrevocably committed to nondebtor beneficiaries and charity, the trust corpus is not brought into the estate merely because the debtor holds an income interest.

## Conclusion

The Eleventh Circuit held that the debtor’s retained unitrust income stream in a self-settled charitable remainder unitrust entered the Chapter 7 estate because the spendthrift clause was ineffective against the settlor-beneficiary’s creditors and the trust was not protected as a support trust, while the trust corpus remained outside the estate due to the debtor’s lack of control over principal and the existence of nondebtor remainder interests.


Menotte v. Brown (In re Brown), 303 F.3d 1261 (11th Cir. 2002)