California Revocable Living Trusts with a spendthrift clause

California Revocable Living Trusts with a spendthrift clause are the topic of this blog post. Using a properly wored spendthrift clause in a California Revocable Living Trust (“trust”) will allow the trust to be considered as a spendthrift trust. This can be advantageous in certain situations where a beneficiary of the trust is not good with money, has an addiction that could cause them to squander the funds, may be easily deceived or defrauded by others, or could easily fall into debt with creditors.

In any of the situations described above, a spendthrift trust allows the trustee to provide for the beneficiary from the trust, without the risk that the principal of the trust will be squandered by misuse, drugs, gambling, a misguided relationship, or excessive debt.

A spendthrift trust is essentially a trust that limits the beneficiary’s ability to waste trust funds. It is set up so that the trustee has complete control over how the trust funds are spent for the benefit of the beneficiary. A spendthrift clause in a trust guards against creditors’ attachment of the beneficiary’s interest in the trust income or principal.

The beneficiary does not own any trust assets, as a result they have no right to offer trust principal, or income, as a guarantee of repayment of a loan. Thus the beneficiary’s creditors will be unable to seize trust assets if the beneficiary is sued.

To be regarded as a spendthrift trust, the creator of the trust must use trust language within the trust agreement that reveals that the trust creator intended that the trust be treated as spendthrift.

But there can be exceptions to spendthrift provisions. Among those exceptions are creditors who provide the beneficiary with necessaries, such as food and shelter. Additionally, trust assets in a spendthrift trust may be seized to make child support and spousal support payments.

If a trust calls for a distribution to the beneficiary, but the beneficiary refuses the distribution and elects to retain property in the trust, the spendthrift protection of the trust ceases with respect to that distribution and the beneficiary’s creditors can now reach trust assets. See Stein, Jacob (2011). A Lawyer's Guide to Asset Protection Planning in California. p. 126.

A typical spendthrift clause states that the trustee of a spendthrift trust has the power to stop all payments to a beneficiary on a temporary or permanent basis if the beneficiary starts spending money recklessly. The trustee may allow the income in the trust to increase or, distribute the income to another beneficiary.

The bankruptcy courts do honor spendthrift clauses in trusts. If the trust has a valid spendthrift provision the trust is not considered part of the bankruptcy estate and the bankruptcy trustee cannot go after the assets in the trust. Title 11 U.S.C. Section 541 (c)(2) states in pertinent part that “a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title."

So that individuals will not create trusts to defeat their own creditors, the laws of most states provide that a spendthrift clause in a trust document does not protect the beneficiary to the extent that the beneficiary is also the person who created the trust. Such a trust is known as a self-settled trust. The settlor does not need to be either the sole settlor or the only beneficiary of the trust. As long as the settlor is a beneficiary of the trust to any extent, to that extent the trust will be deemed self-settled. See Stein, Jacob (Winter 2007). "The Importance of Trusts in Asset Protection". California Trusts and Estates Quarterly.

Attorneys or parties in California who wish to view a sample California Revocable Living Trust for a husband and wife that contains a spendthrift clause sold by the author can use the following link:

View a California Revocable Living Trust with a spendthrift clause

The author of this blog post, Stan Burman, is an entrepreneur and freelance paralegal who has worked in California and Federal litigation since 1995 and has created over 235 sample legal documents. Visit his website at LegalDocsPro website and his Facebook page at Facebook page

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DISCLAIMER:
 
Please note that the author of this blog post, Stan Burman is NOT an attorney and as such is unable to provide any specific legal advice. The author is NOT engaged in providing any legal, financial, or other professional services, and any information contained in this blog post is NOT intended to constitute legal advice.

The materials and information contained in this blog post have been prepared by Stan Burman for informational purposes only and are not legal advice. Transmission of the information contained in this blog post is not intended to create, and receipt does not constitute, any business relationship between the author and any readers. Readers should not act upon this information without seeking professional counsel.