Spendthrift Provision Can Protect Beneficiaries’ Trust Interests

A Los Angeles, San Francisco, East Bay or Sacramento trustee of a trust is often confronted by claims or lawsuits from the creditors of one or more of the trust beneficiaries. These lawsuits often include petitions under Code of Civil Procedure Section 709.010 to enforce a judgment against a trust beneficiary. California law provides certain safe harbors that can be a complete or partial firewall to the claims, even if the claims have validity.

Trust spendthrift provisions – transfer restrictions on distribution of income or principal to a named beneficiary – create these creditor firewalls. Such restrictions may limit the payment of income or principal for education or support.

The desire of a settlor (trustor or maker) to include a “spendthrift provision” in his or her trust may rest on a single or number of concerns. Among the reasons supporting the inclusion of a spendthrift provision are:  To protect trust assets from creditors when a beneficiary is irresponsible with money; To protect beneficial interests from being seized by the judgment creditor of a trust beneficiary; To protect a beneficiary addicted to gambling, alcohol or drugs; and To protect a vulnerable person against the fraud of others.

Spendthrift provisions do not protect against all claims and lawsuits. Exceptions include but are not limited to claims against a principal amount already due and payable to a beneficiary, claims for child support and the right of a general creditor to reach up to 25% of payments due a beneficiary.

Estate, trust and probate litigation attorneys assess the strength of a spendthrift clause by asking important questions about the trust. Among these questions is: Whether the beneficiary owns any of the trust assets? Is the beneficiary entitled to a sum certain payment of principal or interest regardless of his or her needs? Does the beneficiary have exercise or control over trust assets? What if any mandatory distributions are required by the terms of the trust? Is there a specific reference in the trust to a spendthrift clause or provision? Is the claim from the spouse or children of the beneficiary? Is more money distributed to the spendthrift beneficiary than is necessary for his or her education and support needs?

At Hackard Law we primarily focus on estate, trust and probate litigation. If you have a spendthrift or other estate-related litigation issue and you want to learn more about your rights, call us at (916) 313-3030. We look forward to hearing from you.