Eaton v. Boston Safe Deposit & Trust Co.

Background

A trust company held a fund left in trust for Mrs. Fannie Leighton Luke, the adopted daughter and wife of Otis H. Luke of Brookline. The will left $5,000 and directed that Mrs. Luke receive the net income quarterly and enough principal as needed to assure at least $3,000 a year, with a clause saying the income should be free from creditor interference. A trustee in bankruptcy tried to claim the fund, arguing federal bankruptcy law gives a trustee any property the bankrupt could have transferred.

Reasoning

The central question was whether Massachusetts law’s treatment of such a restricted life-income trust prevents it from passing to a bankruptcy trustee. The Court explained that Massachusetts decisions have long treated the restriction as part of the character of the beneficiary’s equitable interest, protecting it from creditors and bankruptcy trustees. The Court reviewed the state cases relied on, found their limits, and declined to upset the established Massachusetts rule. It also noted existing federal decisions that respect state rules about exemptions.

Real world impact

The ruling leaves the trust intact under the Massachusetts rule: Mrs. Luke’s income and the restricted principal stay with the trust and do not become part of the bankrupt estate. People in Massachusetts with similar spendthrift-style life-income trusts can expect the same protection under current state law. The decision rests on state precedent and therefore could change only if Massachusetts courts alter their rule.