Opinion
No. FST CV11-4021004S
October 26, 2011
Ruling on Claim of Exemption
On July 11, 2011 judgment entered for the plaintiff against the defendant Timothy J. Crowley in the total amount of $417,623.86. An execution issued by this court was served upon Connecticut Community Bank at Fairfield which maintains a certain "High Yield Consumer Savings Account" (account number ending in 2580) standing in the name "The Crowley Family Living Trust, Timothy J. Crowley Trustee, Silvia Cardenas-Crowley Trustee." There was a balance of $8,450 in the account at the time the execution was served, which was removed from the account in accordance with Conn. Gen. Stat. § 52-367b(c). The defendant then filed a claim of exemption under Conn. Gen. Stat. §§ 52-321a, 52-352b(m) "Private pension, trust, retirement, or medical savings account payments."
The claim for exemption came up on the August 29, 2011 Miscellaneous and Special Proceedings short calendar. The parties have submitted post-argument briefs on September 7 and October 12, 2011.
The defendant Mr. Timothy J. Crowley testified and placed into evidence the May 30, 2008 Living Trust Agreement establishing the Crowley Family Living Trust. (Ex. B) along with other records. Timothy J. Crowley and Silvia Cardenas Crowley signed the trust agreement as grantors and as trustees. As of June 30, 2011 the trust's bank account had a balance of $8,975.00 consisting of a starting balance of $276.69, a deposit of $150 made on June 24, 2011, another deposit of $8,551.26 made on June 29, 2011, accrued interest of five cents, less a service charge of $3.00. (Ex. D.) Mr. Crowley testified that the deposit of $8,551.26 came from his wife Silvia Cardenas Crowley's income tax refund received from the IRS with respect to her 2010 income tax return. The court finds, however, that the refund was issued to both Mr. and Mrs. Crowley in connection with their joint income tax return, Form 1040, for 2010. (Ex. C.)
The trust is for the benefit of the two grantors and their children. The Trust is divided into two Trustor's Separate Shares, one for each trustor, each consisting of an undivided one-half beneficial interest in the trust assets. During the lives of both grantors (both are living at this time) all distributions of income and principal from the trust estate are to be made one-half from each Trustor's Separate Share. During their joint lifetimes they as Trustees have the power to pay to or apply for the benefit of each Trustor all or part of the principal and income of each Trustor's Separate Share.
Defendant argues that the money held by the Connecticut Community Bank is exempt from the claims of the plaintiff because it is owned by the Crowley Family Living Trust and not Timothy Crowley. He cites Conn. Gen. Stat. § 45a-489 for the proposition that the legal title to the funds in the account is in the name of the co-trustees even though ". . . the settlor of the trust is or may become the sole trustee of any or all beneficial interest therein . . ." On the Exemption Claim Form he checked the box claiming exemption for a private pension trust, retirement, or medical savings account payments exempt under Conn. Gen. Stat. §§ 52-321a and 52-352b(m). The latter statute exempts "[a]ny assets or interests of an exemptioner in, or payments received by the exemptioner from, a plan or arrangement described in section 52-321a." But section 52-321a describes only trusts or other instruments established as part of retirement or other plans which are qualified under various sections of the Internal Revenue Code. The Crowley Family Living Trust is not a plan or arrangement described in section 321a.
In his brief, defendant shifts his emphasis from § 52-321a to § 52-321(a) which subjects non section 52-321a trust income to the claims of creditors of the beneficiary "if the property has been given to trustees to pay over the income to any person without provision for accumulation or express authorization to the trustees to withhold the income . . ." The Crowley Family Trust does have an express provision that: "[d]uring our joint lifetimes our Trustee shall pay to or apply for the benefit of a trustor all or such part of the income or principal of such Trustor's Separate Share of the Trust Estate as such Trustor may direct." (Ex B. Article Four, Section 1.a.) There is also a provision in Article Fourteen, Section 1.p. that: "[o]ur Trustee shall have the power to allocate receipts or expenditures to either income or principal and to create reserves out of income as our Trustee, in our Trustee's discretion, deems appropriate . . .;" and another provision in Article Fourteen, Section 1 that ". . . our Trustee may withhold such distribution, may accumulate income, and may extend the term of the trust as to any portion of the Trust Estate otherwise allocable to the beneficiary." Given these powers of the Trustees, the defendant reasons that § 52-321(a) subjecting the trust income to the claims of creditors does not apply and the income must therefore be exempt.
Defendant and plaintiff have both briefed § 52-321(a), reaching opposite conclusions, but neither party has advised the court what portion of the $8,450 removed from the bank account represents trust income as opposed to trust principal. The June 30, 2011 monthly account statement (Ex. D) shows only five cents of interest income. The July 31 statement (Ex. A) shows $1.38 of interest income. Almost all the money in the account came from the defendant beneficiaries' 2010 joint income tax refund which had only been in the account since June 29, 2011. It is therefore clear that only a very small part of the $8,450 could be income of the trust governed by § 52-321(a).
Plaintiff, argues, on the other hand, that § 52-321(a) does not apply to the Crowley Family Living Trust. The court agrees. In Greenwich Trust Company v. Tyson, 129 Conn. 211 (1942), construing the predecessor statute to § 52-321, the Supreme Court first reviewed the history and development of "spendthrift trusts" first upheld in Leavitt v. Beirne, 21 Conn. 1, 8 (1850) upon the ground that they afforded a proper means of enabling a man to assure protection to relatives or other persons in whom he is interested, and to whom he desires to donate his property, against its waste through their own improvidence or the unfortunate influence of others. "The spendthrift trust is one which provides a fund for the benefit of another, and which secures it against his own improvidence and places it beyond the reach of his creditors." Tyson, supra, at 218-19, quoting from Carter v. Brownell, 95 Conn. 216, 221.
In 1942 the predecessor was General Statutes section 5723, first enacted in 1899, which reads almost identically to the current Section 52-321(a).
The Crowley Family Living Trust has a provision (Article Fifteen Section 1) containing spendthrift provisions, but whether or not those provisions create a valid exemption from the claims of creditors is an issue of law.
The issue in Tyson was whether or not a trust created by a person for his own benefit could qualify as a spendthrift trust beyond the reach of his creditors. The court held that it could not, saying:
The attempt of a man to place his property in trust for his own benefit under limitations similar to those which characterize a spendthrift trust, is a departure from the underlying basis for the creation of such trusts. That aside, the public policy which sustains such trusts when created for the benefit of another is where the settlor is himself the beneficiary, overborne by other considerations. In Johnson v. Connecticut Bank, 21 Conn. 148, 159 where we were considering the right of a creditor of a beneficiary of a trust to secure satisfaction from the latter's right to the income, we stated "`It is the policy of our law, that all the property of a debtor should be responsible for his debts. And his equitable estate may be taken, as well as his legal, provided it is subject to his control' . . . To admit the validity of such trusts would open too wide an opportunity for a man to evade his just debts to be permissible unless sanctioned by statutory enactment. This is the reason why the overwhelming weight of authority hold ineffective attempts to establish them." Id. 219.
Having made that policy determination the court then had to decide if the income of such self-created trusts was available to creditors under section 5723 (now § 52-321(a)) of the statutes. After a comprehensive review of the 1899 legislative history of the act, the court concluded: "Although the trust created by a man from his own property for his own benefit might fall within the literal wording of the statute, it does not fall within the legislative intent, and where the settlor is entitled to the income of the fund, it is not protected from the just claims of his creditors." Id. 222.
The rule of Greenwich Trust v. Crowley is still the law of Connecticut. It has been applied by Judge Thompson in two Superior Court cases involving the Scagliotti Family Trust to subject the trust income to the claims of creditors of the trustor/beneficiary of the trust, even though the trustee had been given the discretion to accumulate income. See Neurological Associates v. Scagliotti Family Trust, Superior Court, Docket No. CV99-0423637 (Thompson, J., Nov. 29, 1999), 1999 WL 1244236; and Yale University School of Medicine v. Scagliotti Family Trust, Superior Court, Docket No. CV99-0423638 (Thompson, J., Nov. 29, 1999) [ 26 Conn. L. Rptr. 68], 1999 WL 1244233. As a matter of public policy, as a discretionary trust established by trustors for their own benefit, The Crowley Family Living Trust cannot enjoy the exemption afforded to a spendthrift trust; and as a matter of statutory interpretation, Conn. Gen. Stat. § 52-321(a) does not apply to the income of the trust.
For these reasons the defendant Timothy J. Crowley's claim of exemption is denied. The $8,450 removed from the account at Connecticut Community Bank standing in the name of The Crowley Family Living Trust, Timothy J. Crowley Trustee, Silvia Cardenas-Crowley Trustee is not exempt from satisfaction of the judgment held by the plaintiff Karl G. Estes as Custodian of the Karl G. Estes IRA.