In a recent case that reached the United States Ninth Circuit Court of Appeals, the Court ruled that assets in Third-Party Spendthrift Trusts (Family Trusts) are not necessarily protected from creditor claims or federal liens against a designated beneficiary. What does this mean for California estate planning?
The beneficiary in question, Michael Harris, had two Trusts set up by his parents for his support. Harris was charged by the federal government with eight counts of theft from a business benefit plan and required to pay $646,000 in restitution. In an attempt to protect the Trust assets from these claims, Harris tried to disclaim his interest in the Trusts. However, the government applied for a writ of continuing garnishment for any property distributed to the beneficiary from the Trusts, and the Court granted this writ.
This case relied on the definition of property, which, in California, includes “a present or future interest, whether legal or equitable…vested or contingent, wherever located and however held.” In this case, the Trusts were to provide for the beneficiary’s health, education, maintenance, and best interest in the discretion of the Trustee. Because the beneficiary could compel distributions should the Trustee fail to act, the Court ruled that such interest was present and vested.
Case precedent appears to make discretionary authority in the Trustee a present and vested interest in the beneficiary. This type of law can jeopardize your children’s inheritance unless it is made strictly conditional. Therefore, it is crucial that you, as Trustors and Trustees, update your Protective Inheritance Trust Provisions to protect your children’s inheritance from these types of cases. In order to ensure that you remain aware of new decisions regarding Trusts and asset protection, it is important that you have named a knowledgeable Trust Protector (new Trust feature) that is able to advise you on the best way to protect your assets and keep you informed about changing laws.