January 13, 2017

Spendthrift Clause and Creditors

A common, albeit erroneous, legal assumption is that a beneficiary's interest in a trust with a spendthrift clause is bullet-proof. That is, the beneficiary's interest cannot be attached by a third-party so as to prevent the beneficiary from enjoying the full benefits of the trust. In certain circumstances, however, a third-party can attach a beneficiary's interest in a trust and direct payments to be made to them and not the beneficiary. A recent unpublished appellate opinion highlighted this example.

Power v. Power, Sonoma County Superior Court, Case # SCV252844

Estranged husband was a 1/6 beneficiary of a trust established by his mother. The trust contained a spendthrift clause. It read in pertinent part that the beneficiary "cannot anticipate, assign or encumber the beneficiary's interest in income or principal. Similarly, a creditor of a beneficiary cannot subject the beneficiary's interest in income or principal to the creditor's claims or to legal process before the beneficiary actually receives a distribution." 

Estranged wife obtained a spousal support judgment against estranged husband. She then sought to attach estranged husband's interest in the trust to satisfy her judgment. The co-trustees balked and estranged wife sued to compel payment from them.

Since estranged wife had a support judgment, she could avail herself of Probate Code § 15305. The statute provides that a support judgment creditor may, under certain circumstances, attach a beneficiary's interest in a trust. The relevant section reads "whether or not the beneficiary has the right under the trust to compel the trustee to pay income or principal or both to or for the benefit of the beneficiary, the court may, to the extent that the court determines it is equitable and reasonable under the circumstances of the particular case, order the trustee to satisfy all or part of the support judgment out of all or part of future payments that the trustee, pursuant to the exercise of the trustee’s discretion, determines to make to or for the benefit of the beneficiary." Probate Code § 15305(c).

The trial court found that the "none of Mark's creditors that have been paid directly from the Trust are preferred or secured creditors. For the most part, these debts are owed to the limited partnership and the Trustees have scrupulously seen to it that Mark pays his debts to his birth family, while leaving Patricia with no funds." It should be noted that the trustees feared reprisal from the estranged husband who threatened to sue them if they paid even "one dollar" to his estranged wife. Hence, it was not as if the trustees refused to satisfy the support judgment whimsically.

On appeal, the trial court's decision to have the co-trustees pay the support judgment directly from estranged husband's share of the trust was upheld.