When establishing your trust, you may want to protect your beneficiaries from their creditors. For example, you may be concerned that after you die your beneficiary will assign their interest in the trust to someone else; or a creditor may try to levy your beneficiaries’ interest in the trust.
To protect your beneficiaries, you can establish three different types of trusts:
- Spendthrift Trust;
- Support Trust; or
- Discretionary Trust.
Spendthrift Trust
California Probate Code Sections 15300-01 provide that if a trust provides that a beneficiary’s interest in income or principal is not subject to “voluntary or involuntary transfer,” the beneficiary’s interest in income or principal is not subject to enforcement of a money judgment until paid to the beneficiary. This is what is commonly referred to a spendthrift or shutdown clause.
Most often, this spendthrift or shutdown provision is all you will need. Yet, it is important to understand that once the beneficiary “receives” the money, a creditor can then attach it. Furthermore, it’s important to understand that for public policy reasons, a creditor can levy the beneficiary’s interest in the trust for child or spousal support, felony restitution or for liability for public support.
Support Trust
Another alternative for protecting assets from creditors is to limit distributions of principal and income to only “education or support” of the beneficiary. This is called a “support trust.” Support under the terms of trust must be limited to education and support of the beneficiary in accordance with their needs and lifestyle.
Discretionary Trust
The third alternative is a discretionary trust where the Trustee has “discretion” as they see fit to pay as much income and principal to the beneficiary or creditor. While many people think this is the best option, case law provides that the Trustee must act in “accordance with fiduciary principles” and must not act in bad faith or in disregard of the trust’s purpose.
In conclusion, protecting your beneficiaries’ interest in your trust from creditors is not easy. If you have a beneficiary who has creditor problems or one who may have creditor problems in the future, talk to your beneficiary and your attorney to make the decisions about how to protect the beneficiary’s assets. If you have questions about estate planning,
Information contained is not a substitute for a personal consultation with an attorney.