How Can a Creditor Beneficiary Enforce Judgments?
A creditor who stands to intercept all or a portion of a beneficiary or heir’s share of an estate or trust is referred to here as a creditor beneficiary.
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Creditor Rights of Creditor Beneficiaries
If a creditor is seeking to satisfy the debt of a trust or estate beneficiary by securing access to their inheritance, it is advisable for them to hire a trust and estate lawyer for help securing a judgment from the court. Without obtaining a judgment, it will be challenging for creditors to enter a creditor’s claim and enforce their right to a beneficiary or heir’s inheritance.
Spendthrift Clauses in Trusts
It is common for people enacting estate plans to execute a trust because of the protections some types of trusts can offer beneficiaries, particularly against creditors.
Two types of trusts that can offer some level of protection to debtor-beneficiaries include discretionary trusts and spendthrift trusts.
With discretionary trusts, trustees can exercise discretion as to how trust assets should be distributed and to whom. Since beneficiaries of discretionary trusts are not technically entitled to any trust property, neither are their creditors.
If and when a debtor-beneficiary becomes entitled to a distribution from a discretionary trust, the creditor beneficiary may become entitled to intercept it.
Spendthrift trusts restrict the “alienation” of a beneficiary’s interest in the trust. In other words, they prohibit the transfer, selling, assignment or giving of a trust beneficiary’s interest in the trust to a third party, such as a creditor. In some states, spendthrift trusts are not legal. While California permits spendthrift trusts, they offer only a limited amount of protection against creditors.
Keystone’s lawyers litigated a case related to defeating a spendthrift trust that resulted in a published decision: Blech v. Blech (2019) 38 Cal.App.5th 941. The ruling affirmed the procedure implemented by Keystone’s creditor beneficiary client – which allowed the creditor to intercept the debtor-beneficiary’s trust distributions – to help satisfy a judgment entered against the beneficiary of a spendthrift trust.
Keystone relied on the recent California Supreme Court case of Carmack v. Reynolds (2017) 2 Cal.5th 844, which significantly decreased the effectiveness of a spendthrift clause by holding that the limitation set forth in Probate Code section 15306.5 only applies to future trust fund distributions, not vested (i.e. due and payable) distributions. As a result of this decision, creditors can reach all due and payable distributions of principal and 25% of all future distributions to satisfy their judgments against trust beneficiaries in California.
While Blech and Carmack favor creditors by drastically limiting protections for debtor-beneficiaries of spendthrift trusts, creditors may not be allowed access to trust distributions if the trust document specified that they were to go toward fulfilling the debtor-beneficiary’s basic or educational needs.