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Understanding The Limitations To Spendthrift Trusts

12/29/2022 | Trust

As you get deeper into your estate planning, the issue of how you can preserve your assets for the benefit of your beneficiaries in Woodland Hills will inevitably come up. Many come to the Law Offices of Alice A. Salvo concerned that their beneficiaries will misuse the money or property they leave to them (or worse, end up losing such funds to creditors). If you share this same worry, some may recommend that you place your assets in a spendthrift trust. These trusts are believed to be virtually untouchable by creditors. However, a unique provision of California law may mean that such instruments are not as ironclad as they seem.

A spendthrift trust is essentially an irrevocable trust with a clause specifying that a beneficiary’s interest will be managed and dispersed at the discretion of the trustee. The thought is that this protects assets from creditors due to them only being able to attach a judgment to that interest that has already been dispersed. Yet Section 15306.5 of the California Probate Code states that even for those trusts on which there is a restraint on beneficiary transfers, a court may order a trustee to satisfy a judgment from future payments that a beneficiary is entitled to.

While this might make adding a spendthrift clause to your trust seem pointless, there is some good news. The law does go on to say that a trustee cannot be ordered to pay in excess of 25 percent of the beneficiary’s future payments. That will at least protect a portion of your beneficiary’s interest in future (provided he or she is able to settle the judgment before more assets are dispersed).

You can discover more about protecting assets with a trust be continuing to browse through our site.