Trusts are often used to give large value gifts when outright ownership is not advantageous for tax or other reasons. A trust is a legal form of ownership where assets are managed by a trustee for the benefit of specified beneficiaries. The beneficiaries are able to enjoy certain benefits of the trust property but they do not own any trust property until it is distributed to them. Trust beneficiaries have only such rights in trust property as the trust document gives them.
Spendthrift trusts are trusts designed to serve a specific purpose. Provisions in the trust restrict a beneficiary’s ability to transfer trust property. The intention in setting up a spendthrift trust is to protect the property in the trust from being squandered by the trust beneficiaries and keep it out of reach of their creditors.
At the Law Offices of Andrew Cohen, we often use spendthrift trusts as tools to help carry out the wishes of our estate planning clients. Our Woodland Hills spendthrift trust attorney can help you determine if a spendthrift trust is the best option to meet your family’s needs.
Why Create A Spendthrift Trust
The goal of a spendthrift trust is to make the trust property last for the beneficiaries and be used for the beneficiaries in a responsible manner. Spendthrift trusts are created when there is concern that the beneficiaries are not able to handle the property in a responsible way and may likely lose it or deplete it too quickly.
Spendthrift trusts are created in situations where a large amount of cash or property is being given away. The beneficiaries might be very young and it may not be known how they will handle such large sums. Or the beneficiaries may have issues such as addictions or the tendency to get themselves in debt. Spendthrift trusts provide oversight so that trust assets remain available to benefit trust beneficiaries no matter what the beneficiaries do.
Are Spendthrift Trust Assets Completely Protected from Creditors
Spendthrift trusts are governed by the California Probate Code because they are typically created as part of an estate plan. As long as trust property is in the trust and the trust beneficiary has no current right to manage or distribute it, the creditors of the beneficiary should have great difficulty accessing trust assets to satisfy the debts of the beneficiary even if they have a judgment.
However, there are situations where the trustee can be compelled to pay a beneficiary’s creditors once funds have been authorized for release to the beneficiary. A recent California Supreme Court case made it a little easier for creditors to access disbursements authorized to a beneficiary to satisfy a judgment.
The Probate Code allows a court to order the trustee of a spendthrift trust to use trust property that is currently owing to a beneficiary to
- Pay a support judgment for a beneficiary’s child, spouse, or ex-spouse
- Pay a restitution judgment where the beneficiary has committed a felony
- Reimburse a public entity for support payments received by a beneficiary
Only amounts in excess of what is necessary for the support and education of a beneficiary are to be paid to creditors and the total paid at any one time can only be 25% of what the beneficiary is to receive.
In Caramack v. Reynolds, the California Supreme Court modified the 25% rule for amounts that are currently due and payable to a beneficiary. For those amounts, a creditor can receive up to the full amount that is due to the beneficiary unless the trust specifies the payment is for the beneficiary’s support and education and the beneficiary needs it for those reasons. The 25% rule still applies to any future distributions to the beneficiary.
Should You Create a Spendthrift Trust
In allowing persons who wish to give property to others a legal way to protect that property from the very persons who are to benefit from it, the law tries to honor the wishes of the person giving the property while also balancing the financial obligations of the beneficiary.
Spendthrift trusts are a secure way to ensure a beneficiary will have adequate long-term resources. The language of the trust can be drafted to maximize the amount a beneficiary will receive even if there are numerous creditors trying to reach the assets. The education and support needs of a beneficiary will always be prioritized before any payments can go to creditors.
The Woodland Hills spendthrift trust lawyer at the Law Offices of Andrew Cohen will discuss your needs, goals, and concerns you have about your beneficiaries. We can then create a trust that carries out your wishes, provides for your beneficiaries, and allows creditors only the most minimal access to trust property. Contact us here to schedule a free consultation with a spendthrift trust attorney or call our Woodland Hills office at 661-481-0100.