Lisa and Jean had fairy tale weddings and lived luxury lifestyles throughout their marriages. Both lived in multi-million dollar homes in Napa and San Francisco, drove Porsches, had nannies and housekeepers, and spent school holidays at exotic destinations. Both also were horrified during divorce when they learned there was no community property and minimal income available to pay child and spousal support. The upside was, neither had any debts, but that didn’t offer much consolation as they searched for entry-level work after living the dream.
Why did such fates befall Lisa and Jean? These lovely ladies were married to, and divorcing the beneficiaries of discretionary, support, and spendthrift trusts who were unemployed. Neither had signed prenuptial or post-nuptial agreements, which 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 important 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) protecting trust property and 2) carrying out the terms of the trust agreement. If the trust agreement doesn’t name you or your children as beneficiaries, either directly or indirectly, the primary role of the estate lawyer during divorce proceedings is to keep money out of your hands. Trust and beneficiary family members may attempt to block discovery of critical trust documents during divorce, but most courts will compel disclosure with redaction to protect the non-party beneficiaries privacy.
2. While one-time inheritances and gifts generally are not treated as “income” for purposes of calculating child support, interest, rents and dividends actually earned from one-time gifts and inheritances are income included when calculating child support. (Fam.C. § 4058(a)(1); County of Kern v. Castle (1999) 75 Cal. App. 4th 1442) And, “[e]ven if a court concludes that it is not proper to include gifts and inheritances as income when calculating guideline support, the court could determine that the receipt of gifts and inheritances could be considered as special circumstances under Family Code Section 4057(b)(5), therapy allowing deviation from the presumptively correct guideline amount.” (Marriage of Loh (2001) 93 CA4th 325)
3. “As distinguished from one-time or sporadic gifts/inheritances, regular gifts of cash received by a parent may be treated as 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)
3. If a trustee acts in bad faith and withholds or stops distributing trust funds to avoid a beneficiary’s child support obligation, a California family court judge may be authorized to compel distributions “…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)
4. The beneficiary of a discretionary trust cannot force a trustee to disburse any of the trust funds. If the beneficiary doesn’t have a right to receive payments from the trust, neither does the beneficiary’s creditors, spouse or children. The court cannot compel the trustee to pay the beneficiary or his/her children or spouse, but if the trustee exercises discretion and disburses funds, the funds may be subject to lien. “The lien attaches the moment in time between when the trustee exercises his discretion to pay the beneficiary and the time the property is transferred to the beneficiary.” If a beneficiary owes child or spousal support arrears or is in default of a court order or breach of a Marital Settlement Agreement and the trustee of a discretionary trust disburses funds to or on behalf of the beneficiary, the court can order the beneficiary to use the funds to pay the arrears or cure the breach or default.
5. Cash distributions received by a trust beneficiary during marriage are the beneficiary’s separate property unless transmuted (legally transformed) into community property or separate property of the other spouse. Unless you have a written agreement stating otherwise, all of the income and assets you and your spouse enjoy during the marriage may belong to your spouse or the trust.
6. Anyone marrying a beneficiary may negotiate and sign prenuptial, post-nuptial, or settlement agreements that disregard the facts and law discussed above, but the terms of the trust documents control so a beneficiary’s promises may be worthless. Anyone marrying a trust fund beneficiary should request and review the terms of the trusts with a competent family law attorney.
If you’re marrying or divorcing a trust fund beneficiary and would like my help, please schedule a consulting and coaching call.