This article provides a roadmap for collecting a money judgment against a beneficiary’s share of assets held in a spendthrift trust. The recent published case, Blech v. Blech (2019) 38 Cal.App.5th 941 (“Blech”), affirmed the procedure implemented by Keystone’s client for collecting his money judgment against the debtor-beneficiary’s share of the trust and, in doing so, closed the timing “loophole” the debtor-beneficiary was seeking to exploit.
The Spendthrift Trust and Spendthrift Clause
The Settlor died on January 13, 2011, causing his living trust (“Trust”) to become irrevocable and the interests of the primary beneficiaries, the Settlor’s four children, to vest. The Trust, however, required that the trustee hold each child’s share for ten years, and to pay a percentage of the principal to each beneficiary every year on the anniversary of the Settlor’s death. The Trust contained a spendthrift clause.
What is a Spendthrift Clause and How Do You Define Spendthrift?
A spendthrift clause is a provision restricting the “alienation” of a beneficiary’s interest in the trust, which is a technical term meaning the beneficiary cannot transfer, assign, sell, or give their interest in the trust to third parties and third parties cannot buy or otherwise take their trust interest. A spendthrift provision is valid in California and, historically, has been enforced to protect the interest of trust beneficiaries from the reach of their creditors.
Beneficiary Disputes Do Not End Even After a Settlement is Reached
Almost immediately after their father’s passing, trust litigation ensued among the beneficiaries. In August 2014, however, all four of the beneficiaries entered into a trust settlement agreement which called for, among other things, beneficiary Richard Blech to pay Keystone’s client a settlement amount. But Richard failed to satisfy his financial obligation, leading Keystone’s client to secure a judgment against Richard. Keystone’s client then filed a petition in the Probate Court seeking to apply Richard’s trust distributions to the satisfaction of the judgment.
The Probate Court granted Keystone’s client’s petition, but due to the existence of the spendthrift clause, the Court limited the amount that could be collected from Richard’s trust distributions to 25% of each yearly principal distribution, with Richard still receiving 75% of each distribution. This result appeared unfair, as Richard was able to directly receive a majority of his principal distributions even though he owed Keystone’s client a substantial sum pursuant to the judgment.
The California Supreme Court Limits the Effectiveness of a Spendthrift Clause
Subsequent to that ruling, however, the California Supreme Court significantly expanded the ability of creditors to reach trust distributions in the landmark case, Carmack v. Reynolds (2017) 2 Cal.5th 844 (“Carmack”). For a detailed analysis of Carmack, see our article, “New Case Expands Creditors’ Access to Funds Held by a Spendthrift Trust.”
In Carmack, the Court interpreted Probate Code section 15301(b)[1] to provide that, upon petition by a creditor, a court may enter an order directing the trustee to satisfy a money judgment out of that principal amount which has become “due and payable” to the beneficiary, meaning it is presently set to be paid to the beneficiary. In addition, the Court held that the 25% limitation set forth in Probate Code section 15306.5 (“the aggregate of all orders for satisfaction of money judgments against the beneficiary’s interest in the trust may not exceed 25% of the payment that would otherwise be made to, or for the benefit, of the beneficiary”) applies to expected (or future) trust distributions but does not apply to vested (i.e., “due and payable”) distributions under Section 15301(b). In reaching this conclusion, the Court reasoned that Section 15301(b) makes clear that spendthrift protections do not apply to distributions of principal that have become due and payable. The Court summarized its ruling as follows:
“In sum, after an amount of principal has become due and payable (but has not yet been distributed), a creditor can petition to have the trustee pay directly to the creditor a sum up to the full amount of that distribution unless the trust instrument specifies that the distribution is for the beneficiary’s support or education and the beneficiary needs the distribution for those purposes.”
Further Trust Litigation Regarding the Interpretation of Carmack
Following the decision in Carmack, Keystone’s client sought to collect the remaining 75% of Richard’s future Trust distributions that he was unable to previously collect. After successfully securing a court order for the remaining 75%, Richard appealed, arguing that because Keystone’s client’s petition was filed prior to the distribution becoming “due and payable,” the Probate Court had no authority to enter the order, even though the Probate Court did not enter the order on the petition until after the distribution became “due and payable.”[2]
The facts of Blech were different than those in Carmack, in that the debtor-beneficiary in Carmack had declared bankruptcy so trust distributions could not be made directly to the beneficiary, so the judgment creditor could comfortably wait until after the distribution became due and payable to file the petition. Conversely, in Blech, the trustee was mandated to make distributions to Richard in January of every year pursuant to the terms of the Trust, so it was imperative for Keystone’s client to intercept the distribution before it was made to Richard.
Ultimately, the Court of Appeal in Blech affirmed the Probate Court’s order, and confirmed the procedure used by Keystone’s client, thus providing a roadmap as to how to secure the entirety of a debtor-beneficiary’s principal distribution from a spendthrift trust in satisfaction of a judgment.
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[1] Probate Code section 15301(b) provides: “After an amount of principal has become due and payable to the beneficiary under the trust instrument, upon petition to the court under Section 709.010 of the Code of Civil Procedure by a judgment creditor, the court may make an order directing the trustee to satisfy the money judgment out of that principal amount.”
[2] The Probate Court further ordered the trustee not to make any distributions from Richard’s share of the Trust until an order was entered on the petition.
