I Don’t Like My Child’s Spouse. Help!

So your kids are adults. Or are they? Well, one of your kids is married, but you have your doubts as to the longevity of the marriage (which you do not tell your child, of course). And you’re thinking about your estate plan. So: What do you do? The good news is that there are a few options to minimize the chances your “future ex in law” will be able to put his or her hand in your cookie jar, and/or eat the whole cake in a divorce. While we hope that divorce never happens, we know it can.

A Word About Community Property

This is a very common question. And again, the good news is that there is an answer. To arrive at the answer (which may or may not be what you expect), you need to understand two points.  We can also note at the outset that California is a “Community Property” state.

First, Section 770(a) of the California Family Code provides the following:

Separate property of a married person includes all of the following:

1.     All property owned by the person before marriage.

2.     All property acquired by the person after the marriage by gift, bequest, devise, or descent.

3.     The rents, issues, and profits of the property described in this section.

While this article oversimplifies the family law aspects of estate planning and divorce, the key point is that, unless it is commingled with community property or the other spouse’s separate property or they gift it to their own respective spouses, the property your children inherit from you is their “Separate Property” and not “Community Property”: in general, it is not “divided” between the beneficiary and their spouse in their potential, future divorce.  (It is recommended that you consult with a California State Bar Board Certified Family Law Specialist if you are interested in learning more about family law and divorce.)  Again, assuming that the property your child inherits from you remains their “Separate Property,” it may remain their “Separate Property” in a divorce (and mandating that the property remain in your trust, as opposed to passing outright to the beneficiary, may increase the likelihood that it will remain the beneficiary’s “Separate Property”).

Second, though, we need to consider what often happens as a result of divorce: spousal and/or child support payments.  If your beneficiary ends up divorced after your passing, they may very well end up with a court order to make ongoing spousal/child support payments.  This is the punch. 

Asset Protection in California: The Discretionary Spendthrift Trust to the Rescue?  Not So Fast!

The question you’re asking is, “Are you telling me that, if one of the beneficiaries of my trust divorces after I’m gone, and if the former spouse has an order for support payments, they can come after the beneficiary’s trust share?”  Yes.  Yes indeed.  To understand this, we need to think about the basic concept of California asset protection (which is not at all “basic!”).

Asset protection is using legal techniques (tools that are legal in nature but also legal in that they do not result in tax evasion, are not to hinder, delay, or defraud creditors, do not involve perjury, do not result in insolvency and are not undertaken while insolvent, and do not otherwise result in general lawbreaking, etc.) to shield or protect one’s property from civil money judgments. 

Numerous forms of trusts and various trust and debtor/creditor doctrines and statutes are used to (try to) protect one’s assets and achieve other contemporaneous objectives, i.e., tax objectives.  Trusts and asset protection have long gone hand in hand (with varying outcomes!).

In short, in California (unlike 17 or so other states), a trust that one creates for oneself cannot and does not protect one’s own assets. Stated another way, if you create a California trust and you are a beneficiary of that trust, that trust is known as a “self-settled trust” and will not protect your assets from creditors, civil money judgment enforcement actions, bankruptcy, etc. 

But what if you don’t create the trust?  What happens from the perspective of a trust beneficiary who is inheriting property in a trust that a deceased person (you) made, for their benefit? 

From the beneficiary’s perspective (i.e., your adult child), the trust is not a “self-settled trust,” as the beneficiary did not make the trust or fund the trust with their own property.  Assuming the inherited property remains the beneficiary’s “Separate Property,” if the beneficiary becomes divorced later, there’s a chance the inheritance will remain “in the family” and not be divided in the divorce.  (Again, this oversimplifies family law and divorce, and a California State Bar Board Certified Family Law Specialist may need to be consulted.). 

In addition, a trust that contains a “spendthrift clause” that prohibits the beneficiary’s share from voluntary or involuntary assignment or transfer can provide some protection to the beneficiary in the event the beneficiary’s creditors come knocking.  This is known as a third-party “spendthrift trust.”  If the trust also requires an independent trustee and affords them complete discretion as to when and whether to make distributions, the trust may be referred to as an “independent trustee discretionary spendthrift trust” (as opposed to a support trust that allows either an independent party or the beneficiary to serve as trustee and distribute for the beneficiary’s health, education, maintenance, or support).  So far so good. 

However, coming full circle now, California law affords a “support creditor” (former spouse with an order for spousal/child support) “superpriority status” and allows the former spouse to petition a California court to siphon off the beneficiary’s trust share and satisfy outstanding spousal/child support payments.  See Cal. Probate Code Section 15305; Ventura County Dept. of Child Support Services v. Brown (2004) 117 Cal.App.4th 144.  With trusts governed under California law, whether or not the trust is discretionary and whether or not the trustee has a right to compel distributions does not matter.  In California, the California Probate Code and caselaw make clear that public policy favors support creditors being able to ask a court to force a trustee to distribute to the beneficiary to satisfy outstanding spousal/child support obligations. 

A Living Trust May be Better than Nothing!

You may be tempted to think that the takeaway is that a living trust is pointless, at least from the standpoint of protecting your beneficiaries’ trust shares from future divorce.  “What’s the point,” you ask, “if everyone knows the former spouse will get an order for support and file a successful petition to enforce the judgment against the trust share, even a discretionary spendthrift trust!” All hope is not lost, though.

For one, as mentioned above, mandating that the beneficiary’s share be held in trust during the beneficiary’s lifetime may help prevent the beneficiary from making the inadvertent mistake of having the property becoming recharacterized from being their own Separate Property, into Community Property, and thereby subjecting it to equitable distribution in divorce.  Why not do all you can to prevent that?  While you can’t prevent anyone from getting divorced (at least not after you’re gone!) and can’t prevent your “future ex in law” from parachuting into court to enforce against the beneficiary’s inherited trust share a spousal/child support order, don’t make it any easier, either.  By requiring that the beneficiary’s share remain in trust, you’re keeping the property out of the beneficiary’s own hands.

Second, as the previous paragraph is illustrating, you may have other reasons for using a revocable living trust, too.  As was also mentioned above, you may wish to prohibit the beneficiary from serving as their own trustee and instead require that an independent trustee determine when and how to distribute, if at all.  A trust can also protect the beneficiary from themselves (spendthrift or substance abuser) and may be necessary for persons with special needs. 

Third, if the divorcing or divorced beneficiary has their own assets from which the judgment for support may be paid, the trustee may be able to fend off a petition to enforce a support judgment against the trust and a forced distribution.

And as to potential asset protection from a beneficiary’s general creditors (creditors other than support creditors), that will have to be addressed in another article!

The Law Office of Ryan J. Casson, located in Camarillo (Ventura County), can work with you to think through the potential pros and cons in deciding who your trustees ought to be, how to leave your property to your beneficiaries, and what asset protection means to you.  (What level of asset protection are you most comfortable with?)

A proper California estate plan needs to be tailored to your particular objectives, your concerns, and how you view the potential pros and cons.  You need a California estate planning and asset protection attorney who understands the nuances of California estate planning, asset protection in California, and California trust and estate litigation. Do not listen to your neighbors or the Internet: Call attorney Ryan J. Casson today!