Lisa and Jean had fairy tale weddings and luxurious lifestyles during marriage. They 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 that neither had any debts, but that didn’t offer much consolation as they searched for entry-level jobs after living their dreams.
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 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 the state of California.
1. The top priorities of a trustee or trust attorney are to protect trust property and to carry out the terms of the trust agreement. If the trust doesn’t 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. Trustees and beneficiaries might also try to block your discovery of critical trust documents, but most courts will compel disclosure with instructions to redact (black-out) terms that pertain to other beneficiaries who aren’t your spouse or children.
2. Under California family law, a one-time inheritance or gift is generally not considered 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) This means a judge may or may not consider a single lump-sum distribution to a spouse as income for purposes of calculating support.
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) This means, if your spouse regularly receives passive income from trust assets, the funds can be used to establish and pay support.
4. Unlike one-time or sporadic gifts and inheritances, if a parent receives regular gifts of cash, the court includes the income when calculating child support, “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. According to California law, “…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) This means, if a trustee withholds trust funds to avoid paying a beneficiary’s child support obligation, a California family court judge can compel trust distributions.
6. According to the California Appellate Court’s ruling in Pratt v Ferguson (2016) 3 Cal.App.5th 102, “Probate Code section 15305 gives the trial court discretion to order a trustee to make distributions of income and principal to satisfy the final child support orders. Probate Code section 15305, subdivision (d) expressly states that the section ‘applies to a support judgment notwithstanding any provision in the trust instrument.’”
6. The beneficiary of a discretionary trust cannot force a trustee to disburse trust funds. If a beneficiary can’t compel a trustee to disburse assets, nor can the beneficiary’s creditors, spouse, children, or a judge unless, as discussed above, the denial is in bad faith with the intent to deprive a beneficiaries’ children of support. If, on the other hand, the trustee exercises discretion and disburses funds, and the beneficiary owes child or spousal support arrears, a judge can order the beneficiary to use the funds to pay 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 don’t have a written agreement so stating, all of the income and assets you and your trust fund spouse 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.