Carla Spivack, Faculty Blog, Kent Schenkel

The Two-Word Clause that Could Prevent Jeffrey Epstein’s Alleged Victims from Receiving Financial Justice

The will and trust of Jeffrey Epstein, financier and accused sex trafficker, have been making headlines this week. These documents seem to have been a last-ditch – and probably, in the long run, futile – attempt to protect Epstein’s assets from the claims of his accusers. It’s unlikely that he managed to transfer his assets to the trust in the two days between completing the will and dying by suicide. Even if he had succeeded in the transfer, the lawsuits pending against him at the time would likely make the transfers void in the eyes of the law.

But if he had planned a bit better, he might have succeeded. For example, if he had created and funded the trust years ago, before any of his crimes had come to light, and before the women he allegedly abused started filing suits, it might have worked. Leaving Jeffrey Epstein aside, this case is an opportunity to expose how the law of trusts protects the assets of wrongdoers from collection by their victims—even if those victims were awarded damages in a court of law.

This is possible through the “Spendthrift Clause,” a piece of language included in most trust instruments. It’s couched in legalese, but what it comes down to is this: the money in the trust cannot be used to pay persons who are owed money by those who benefit from the trust. This short clause is the reason why Kyle Krueger, a man who was criminally convicted of videotaping his sexual assault on a four-year-old boy, and then circulating the videotape on the internet, paid nothing in damages awarded to the child and his mother.

Though the jury awarded the victim more than $500,000, Krueger’s only assets were in a trust with a Spendthrift Clause, which barred the trust assets from being reached by “creditors.” The boy’s mother argued that the clause might be effective in preventing commercial creditors—like credit card companies—from recovery, but should not apply in cases where the creditor is an involuntary victim of wrongdoing. But the court refused to make an exception.

In a similar case, Gene A. Lorance was driving under the influence and collided with Will Sligh, leaving the man paralyzed from the waist down. Lorance was uninsured, so the Slighs sued him for personal injury, property damage, and loss of consortium. Lorance’s only assets were his interest in two trusts established by his mother, both of which had Spendthrift Clauses. Evidence suggests that Lorance’s mother knew that her son was a chronic alcoholic whose mental capacity was impaired due to his drinking, that he had numerous arrests for drunk driving, and that he had been institutionalized for mental illness. Like Lorie Scheffel, Sligh argued that the court should create a public policy exception to spendthrift trusts in cases like this. This time, the court agreed, stating that compensating the victim was more important than upholding the clause. In 2004, in response, the Mississippi legislature enacted a statute that essentially overruled Sligh by providing that a spendthrift clause in a trust would bar even tort victims like Will Sligh from recovering damages. Today, almost every state in the country enforces these clauses against tort victims.

For more than a hundred years, these clauses have been enforceable as a way for people like Lorance’s mother to fund trusts for third parties like her son and protect the funds from people they harmed. But recently some states have begun allowing people to set up such trusts for themselves if they are worried about future creditors.

Why do legislatures pass laws that enforce these clauses against tort victims? Why would they vote for laws that would bar their constituents from recovery for terrible injuries and maybe even put them on public assistance, costing everyone else in the state? There are two simple answers:  lobbying by the trust industry and public oblivion to these issues. Laws like this are debated and passed with no fanfare or news coverage. If people were aware of these issues and put pressure on their representatives, it would offer a counterweight to the power of lobbyists.

Jeffrey Epstein might have been able to prevent his victims from recovering anything from his five hundred million dollar estate. Should trust law allow this? Maybe it wouldn’t, if more people were paying attention.

Professor Kent Schenkel teaches Estate and Gift Tax; Estate Planning; and Wills, Estates, and Trusts at New England Law | Boston. Professor Carla Spivack is an Oxford Research Professor and the Director of the Certificate Program in Estate Planning at Oklahoma City University School of Law.