Brought to you by the Law Offices of Jack B. Friedell.
A common estate planning 101 question we receive from clients is how a Settlor (the person creating the trust) can protect a beneficiary’s inheritance from creditors. Typically, this question comes up because the Settlor of the trust is leaving monies to a beneficiary that he or she knows has problems when it comes to finances. The good news is a spendthrift trust can help protect a beneficiary’s inheritance and keep creditors at bay.
California Probate Code § 15300
To summarize California Probate Code § 15300 in part: if there is no language in the trust that makes for a voluntary or involuntary transfer of a beneficiary’s interest, then the beneficiary’s income interest does not have to be transferred and cannot be touched by a creditor for a money judgment until the income is actually paid to the beneficiary.
Basically, a creditor cannot attach a judgment to the assets of a trust due to a beneficiary until the assets have actually been distributed to the beneficiary.
The advantage to the beneficiary protected by the spendthrift provision is that he or she can protect their inheritance from creditors. Granted, the beneficiary must be careful on how he or she takes their distribution from the trust assets, but at least the creditor cannot get a lump sum judgment and deplete the beneficiary’s entire inheritance.
Why might someone consider providing a spendthrift provision in their trust?
The most common reasons for providing the provision are for the following type of beneficiary:
- The Squanderer: The beneficiary has poor money management skills
- The Addict: The beneficiary has an addiction to drugs or alcohol
- The Gambler: The beneficiary has a gambling addiction
- The Consumer: The beneficiary has a propensity to acquire large amounts of debt
- The Used and Abused: The beneficiary has a history of being taken advantage of by friends and family
Each of these beneficiaries has one thing in common—they and money are soon parted. If you are having an attorney create a trust for you, it is in yours and your beneficiary’s best interest to include a spendthrift provision in your trust. Then the trustee can make distributions as the trustee deems prudent. This will protect your beneficiary in the short term and perhaps help buy your beneficiary some time to allow them to learn a valuable lesson about the importance of good money management.
Exceptions to spendthrift provisions
There are exceptions to the spendthrift clause in a trust document. The most common reasons a spendthrift provision in a living trust will not be followed is due to either:
- Creditors who provide the beneficiary with necessaries, such as food and shelter
- Children and ex-spouses for child support and spousal support payments
The bottom line is, whether your beneficiaries fall into any of the above categories or not, it is prudent to include a spendthrift provision in your living trust. It will not detract from the value of your trust and it could very well protect a beneficiary down the road. Life is unpredictable. Therefore, it is better to be safe than sorry.
For questions on the above content or for any other legal advice dealing with spendthrift trusts, an experienced California trust attorney can help. Please contact the Law Offices of Jack B. Friedell today.
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