Many California living trusts contain a “spendthrift clause”— a clause designed to protect trust assets from claims made by a beneficiary’s creditors. Spendthrift provisions commonly include a “shutdown clause,” which stops payments to a beneficiary during any time that the trust could be subject to creditors’ claims. A recent decision held that under California Probate Code Section 15305, the trial court has the power to order a trustee to satisfy a final child support order, irrespective of any shutdown clause. (Pratt v. Ferguson (2016) 2016 WL 4613353.) This article discusses the Pratt decision, and how the language of Probate Code Section 15305 is applied to a creditor’s claims against a trust with spendthrift and shutdown clauses.
Probate Code Section 15305 provides:
(a) As used in this section, “support judgment” means a money judgment for support of the trust beneficiary’s spouse or former spouse or minor child.
(b) If the beneficiary has the right under the trust to compel the trustee to pay income or principal or both to or for the benefit of the beneficiary, the court may, to the extent that the court determines it is equitable and reasonable under the circumstances of the particular case, order the trustee to satisfy all or part of the support judgment out of all or part of those payments as they become due and payable, presently or in the future.
(c) Whether or not the beneficiary has the right under the trust to compel the trustee to pay income or principal or both to or for the benefit of the beneficiary, the court may, to the extent that the court determines it is equitable and reasonable under the circumstances of the particular case, order the trustee to satisfy all or part of the support judgment out of all or part of future payments that the trustee, pursuant to the exercise of the trustee’s discretion, determines to make to or for the benefit of the beneficiary.
(d) This section applies to a support judgment notwithstanding any provision in the trust instrument.
David Pratt obtained court orders requiring his ex-wife, Cynthia Vedder, to pay child support and expenses. Vedder was the beneficiary of a trust established by her grandparents. Pratt filed a petition to compel the trustee to satisfy the orders from Vedder’s share of the trust estate. The trial court denied the petition based on a clause that prohibited the trustee from making certain distributions if they would become subject to Vedder’s creditor’s claims (the shutdown clause). The Court of Appeal reversed the trial court ruling, and held:
We have concluded, for reasons of public policy expressed in the statute, that the shutdown clause cannot prohibit satisfaction of the final child support orders from periodic payments of principal. The other distributions of principal and interest are all covered by the statute, as we have explained. Thus, with respect to all distributions of income and principal of the Trust, the trial court must exercise its discretion under Probate Code section 15305, subdivisions (b) and (c).
The trial court failed to exercise any discretion in declining to order payments from the Trust. The failure to exercise discretion is an abuse of discretion (Law Offices of Dixon R. Howell v. Valley (2005) 129 Cal.App.4th 1076, 1090-1091).
The trial court erred by applying the shutdown clause to preclude the use of any of the Trust’s assets—whether principal or income—to satisfy the child support judgment. The court never reached the question of how to exercise its discretion, much less actually exercise its discretion. We conclude that the trial court, with the analytical framework and guidance in this opinion, should be given the opportunity to exercise its discretion in the first instance.
The lesson from Pratt for trust and estate planning attorneys is that we may need to consider options other than spendthrift clauses when estate planning clients express serious concerns about their children’s creditors. One option might be to create a separate trust in a state that provides greater protection against claims by a beneficiary’s creditors.