There are some estate planning situations in which you may want to protect a family member’s potential inheritance from his or her creditors. For example, many trusts contain what is known as a “spendthrift clause,” which restricts a beneficiary’s access to the trust principal. In other words, the trustee maintains control—subject to the terms of the trust—over how and when to make payments to the beneficiary. Since the beneficiary does not have direct access to the principal of the trust, it is not considered the beneficiary’s property and therefore is not subject to a court process in satisfaction of a judgment against the beneficiary. A spendthrift clause also typically prevents the beneficiary from assigning his or her interest in the trust to satisfy a creditor’s judgment.
“Shutdown” Clause Does Not Protect Beneficiary From Child Support Judgment
At least that is how a spendthrift clause works in theory. In practice, there are circumstances in which a court may still order a trust to pay a beneficiary’s creditors. A California appeals court recently addressed such a situation in a published opinion.
The case actually arises from a contested divorce. The ex-wife was ordered to make child support payments to her ex-husband. The ex-wife was also a beneficiary of her grandparents’ trust. The trust directed the trustee to make periodic payments from the trust’s principal to each beneficiary. The trust also contained both a spendthrift and a “shutdown” clause. The latter directed the trustee to cease making principal payments to any beneficiary if such funds “would become subject to the enforceable claims of creditors of the beneficiary.”
Here, the ex-husband sued the trustee, arguing that notwithstanding the spendthrift and shutdown clauses, he was entitled to recover his ex-wife’s court-ordered child support payments from her interest in the trust. A judge disagreed and dismissed the petition. But in a published opinion, the California Fourth District Court of Appeal reversed the trial court and ordered it to reconsider the petition.
The Fourth District said the shutdown clause “does not purport to cover all distributions by the Trust.” As noted above, the shutdown clause only applied to distributions of the trust’s principal. The trust also required the trustee to make periodic payments of trust income to the ex-wife. These payments are not protected by the shutdown clause. Nor are they saved by the spendthrift clause, the court explained, because as matter of California public policy such clauses “cannot be employed by the Trustee to avoid a proper child support judgment.”
The appeals court did not directly order the trust to make the ex-wife’s child support payments. Rather, it returned the case to the probate court for further proceedings. But the appeals court expressly instructed the probate judge to determine whether the original trust affords the trustee the discretion to pay the child support order, and if so, whether the trustee would be acting in “bad faith” by refusing to make such payments.
Get Trust Advice From a San Diego Estate Planning Lawyer
Trusts are often complicated affairs, especially when they deal with more than one generation of beneficiaries. That is why, if you are considering making a trust, it is important to consult with an experienced California estate planning attorney. Contact the Law Office of Scott C. Soady in San Diego today if you need to speak with an attorney.