Lisa and Jean had fairy tale weddings and luxurious lifestyles during marriage. Both lived in multi-million dollar homes in Napa and San Francisco, drove Porsches, had nannies and housekeepers, and travelled to exotic destinations. Both also were horrified during divorce when they learned there was no community property, and the income available to pay child and spousal support was minimal. The upside was, neither had any debts, but that didn’t offer much consolation as they searched for entry-level jobs after living the dream.
Why did Lisa and Jean suffer such fates? Each was married to, and divorcing a trust fund beneficiary in California. Neither had signed a prenuptial or post-nuptial agreement that might, but wouldn’t necessarily have changed the outcomes in their divorces.
Lisa and Jean’s stories aren’t uncommon, and won’t be in vain if you take heed. Here are eight critically essential things to know if you’re marrying or divorcing a trust fund beneficiary in California.
1. The top priorities of a trustee or trust attorney are: 1) to protect trust property and 2) carry out the terms of the trust agreement. If the trust does not name you or your children as trust beneficiaries, the primary role of the estate lawyer during divorce will be to keep money out of your hands. Trust and beneficiary family members may attempt to block the discovery of critical trust documents during a divorce. Still, most courts will compel disclosure with redaction to protect the non-party beneficiaries’ privacy.
2. Under California family law, a one-time inheritance or gift is generally is not income for purposes of calculating child support. Still, a judge may rule that a parent’s receipt of a gift or inheritance is a special circumstance under Family Code Section 4057(b)(5) that justifies a deviation from the presumptively correct amount of guideline child support. (Marriage of Loh (2001) 93 CA4th 325)
3. Interest, rents, and dividends from an estate or legacy are regularly characterized as income to calculate child support. (Fam.C. § 4058(a)(1); County of Kern v. Castle (1999) 75 Cal. App. 4th 1442)
4. Unlike one-time or sporadic gifts and inheritances, regular gifts of cash a parent receives may be income for child support purposes, “so long as the gifts bear a reasonable relationship to the traditional meaning of income as a recurrent monetary benefit.” (Marriage of Alter (2009) 171 CA4th 718; Marriage of Williamson (2014) 226 CA4th 1303)
5. “…in exercising its discretion to make or withhold payments, a trustee may not act in bad faith or with an improper motive.” (Ventura County Department of Child Support Services v. Brown (2004) 117 Cal.App.4th 1347) If a trustee withholds trust funds to avoid a beneficiary’s child support obligation, a California family court judge may compel trust distributions.
6. The beneficiary of a discretionary trust cannot force a trustee to disburse trust funds. If a beneficiary cannot compel a trustee to disburse assets, nor can the beneficiary’s creditors, spouse, children, or a judge. Still, if the trustee exercises discretion and disburses funds, the funds may be subject to a lien. The lien attaches the moment the trustee exercises the discretion to pay a beneficiary. If a beneficiary owes child or spousal support arrears, and the trustee of a discretionary trust disburses funds for the beneficiary, a judge can order the beneficiary to use the funds to pay the arrears.
7. Cash distributions a trust beneficiary receives during marriage are the beneficiary’s separate property unless he/she transmutes (legally transforms) the asset into community property or the separate property of the other spouse. If you do not have a written agreement so stating, all of the income and assets you and your trust fund baby enjoy during the marriage may belong to your spouse or the trust.
8. Anyone who marries a beneficiary can negotiate and sign a prenuptial or post-nuptial agreement that disregards the facts and law above. Still, the terms of the trust documents generally control, so a beneficiary’s promises may be worthless. Anyone who plans on marrying a trust fund beneficiary should review the terms of the trusts with a competent family law attorney before the wedding.
