SAN FRANCISCO — The California
Supreme Court recently was asked to clarify certain provisions of the
state’s Probate Code.
In the case of Carmack
vs. Reynolds, defendant Rick H. Reynolds was entitled to receive
more than $1 million in trust principal under the terms of a
spendthrift trust that was established by his parents. Reynolds filed
for voluntary bankruptcy under Chapter 7 of the U.S. Bankruptcy Code
the day after his father died. Trustees for the family trust then
wanted a declaratory judgment on the reach of the bankruptcy
trustee's interest in that trust.
Court documents showed
that the bankruptcy court determined that under the California
Probate Code, the bankruptcy trustee standing as a hypothetical lien
creditor could reach 25 percent of Reynolds' trust interest.
The bankruptcy appellate panel affirmed. The bankruptcy trustee
appealed to the 9th Circuit, which asked the Supreme Court
to clarify if the Probate Code puts a cap of 25 percent on what a
bankruptcy estate can access in a spendthrift trust.
“We conclude that a bankruptcy trustee, standing as a
hypothetical judgment creditor, can reach a beneficiary's interest in
a trust that pays entirely out of principal in two ways,” the court
“It may reach up to the full amount of any distributions of
principal that are currently due and payable to the beneficiary,
unless the trust instrument specifies that those distributions are
for the beneficiary‘s support or education and the beneficiary
needs those distributions for either purpose.
“Separately, the bankruptcy trustee can reach up to 25 percent
of any anticipated payments made to, or for the benefit of, the
beneficiary, reduced to the extent necessary by the support needs of
the beneficiary and any dependents.’’
Reynolds is entitled to $250,000 from the trust if he survived his
father by 30 days, as well as to receive $100,000 a year for 10 years
and then one-third of the remainder.
Court documents said the Reynolds family's assets are in
undeveloped real estate that do not produce income. While they are
estimated to be worth several million dollars, the exact value will
be known only when there is liquidation of trust assets.
The Supreme Court also wrote that the Probate Code does not impose
such an absolute limit on a general creditor‘s access to the trust.
“With limited exceptions for distributions explicitly intended
or actually required for the beneficiary's support, a general
creditor may reach a sum up to the full amount of any distributions
that are currently due and payable to the beneficiary even though
they are still in the trustee‘s hands, and separately may reach a
sum up to 25 percent of any payments that are anticipated to be made
to the beneficiary,” the court wrote.