What Is a California Spendthrift Trust?
Living trusts can be further sub-divided into revocable and irrevocable living trusts while a testamentary trust is always revocable because a Will is always revocable.
Trust BasicsA trust is a relationship whereby property is held by one party for the benefit of another. The terms and provisions of a trust are reduced to writing in a document referred to as a “trust agreement.” Trusts are broadly divided into living trusts and testamentary trusts with the former activating during the lifetime of the Settlor (the creator of the trust) and the latter typically being activated at the time of the Settlor’s death by a provision in the Settlor’s Will. Living trusts can be further sub-divided into revocable and irrevocable living trusts while a testamentary trust is always revocable because a Will is always revocable.
Why Might I Need a Spendthrift Provision in My Trust?A spendthrift provision is a provision you can include in a trust. It can be helpful if you plan to pass down a moderate to large inheritance, but you are worried that the assets you leave behind might be squandered.
What Is a Spendthrift Provision?A spendthrift clause refers to a clause within a trust that is aimed at preventing the beneficiaries of the trust from squandering their inheritance. Specific language must be used to create a spendthrift clause; however, when drafted properly, a spendthrift clause will prevent a beneficiary from spending the trust funds frivolously as well as prevent borrowing against those funds or encumbering the funds in any way. A spendthrift clause can also prevent creditors of the beneficiary from accessing the trust funds to pay debts of the beneficiary.
California Spendthrift Provisions and the LawState law governs the validity and enforceability of a spendthrift clause. Most states recognize the validity of a spendthrift provision to prevent both voluntary and involuntary transfers of a beneficiary’s interest in the trust. In 2017, the California Supreme Court handed down a ruling that significantly weakened the protection offered by a spendthrift provision within a trust. Prior to the holding in Carmack v. Reynolds, the law essentially protected assets held by a trust until those assets were distributed to the beneficiary.
Now, the law allows creditors to reach undistributed assets. Specifically, the court said that “[w]ith limited exceptions for distributions explicitly intended or actually required for the beneficiary’s support, a general creditor may reach a sum up to the full amount of any distributions that are currently due and payable to the beneficiary even though they are still in the trustee’s hands, and separately may reach up to 25 percent of any payments that are anticipated to be made to the beneficiary.”
The 2017 ruling did not do away with the “beneficiary support” exception. The beneficiary support exception continues to protect assets that are designated for the support of the beneficiary.