Trusts are usually straightforward. The settlor creates the trust, the trustee manages and administers it, and the beneficiary receives their share. However, confusion may arise if creditors appear and demand payments from the trust. Fiduciaries and beneficiaries must equip themselves with the proper knowledge to handle this situation. Otherwise, it might create complications to the trust and compromise interested parties’ rights.
Looking into the nature of the trust
Creditors can only go after assets that a debtor owns and controls. If a debtor creates an irrevocable trust, they give up control and no longer have ownership over the assets, which the trust now owns. Therefore, creditors cannot go after the trust. However, if the trust is revocable, creditors may be able to access the assets because the grantor still has control over and benefits from the trust.
Analyzing the spendthrift trust’s provisions
If the trust agreement provides that the trustee has full power to decide how the assets meant for the beneficiary will be spent, creditors may be able to access money allocated for the beneficiary, whether or not it has been distributed or not. This is known as the spendthrift trust.
Court-ordered garnishment to cover beneficiary’s debts
In some cases, California allows judgment creditors to collect debt payments from the amount the beneficiary debtor is entitled to receive under the trust. The trustee, by court order, shall satisfy all or part of the judgment amount. However, the creditor can only garnish not more than 25% of the beneficiary’s portion of the trust. Moreover, they cannot reach assets that are necessary to support the beneficiary and their dependents.
This is merely a gist of how creditors can reach into a trust to satisfy debts. Other factors play a significant role in trust administration and litigation. If you are a trustee or a beneficiary who is facing creditor claims and have little to no clue about the situation, you can seek assistance from an experienced legal professional to protect your rights.