March 23, 2017

Bankrupt beneficiary of spendthrift trust has only limited protection for his interest in the trust

In Carmack v. Reynolds, a case involving a bankruptcy trustee’s attempt to access funds in a spendthrift trust, the Supreme Court today answers a state law question posed by the Ninth Circuit.  The court’s unanimous opinion by Justice Goodwin Liu agrees with the federal court that “the relevant [California] statutory provisions are ‘opaque,'” and concludes that one of the statutes at issue likely “reflects a drafting error.”

The court holds, “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 [spendthrift trust] 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.”  Also, for most of those who do not practice in the field or who have not been in law school within the past year, the court explains, “A spendthrift trust is a trust that provides that the beneficiary’s interest cannot be alienated before it is distributed to the beneficiary.”

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