A trust, whether revocable or irrevocable under California Probate Code Section 15400, is created by the settlor(s) to transfer properties or assets to the trust to be administered by the trustee(s) for the benefit of the beneficiaries named in the trust instrument until distribution or termination of the trust.
A revocable trust may be revoked or modified by the settlor(s), under Probate Code Sections 15401 and 15402.
But all beneficiaries are generally required to consent to the termination or modification of an irrevocable trust, under Probate Code Sections 15403 and 15404.
Once the trust created under the Probate Code which relates to real property is recorded in the office of the county recorder in the county where all or a portion of the real property is located, under Probate Code Section 15210, and certain properties transferred to the trust under the control of the trustee(s) under Probate Code Section 16006, what are the rights of judgment creditors? The Rights of Judgment Creditors of Settlor(s) & Beneficiaries, In a Irrevocable Trust: In an irrevocable trust, wherein the settlor is not a beneficiary of the trust, the property or asset transferred to the trust, even if administered by a trustee who is also the settlor, is exempt from enforcement of judgment creditors' claims against the settlor.
But if the settlor is a beneficiary of a trust created by the settlor, and the voluntary or involuntary transfer of the settlor's interest is restrained by the trust instrument, such restraint is invalid against creditors of the settlor who can enforce judgments against the settlor's interest, under Probate Code Section 15304.
As to judgment creditors of the beneficiaries in an irrevocable trust, similar restraint on voluntary or involuntary transfer of beneficiary's interest in the principal (property or income) in the trust prevents enforcement of money judgments of creditors of a beneficiary, until the principal is paid to the beneficiary, under Probate Code Sections 15300 and 15301.
Such restraint on voluntary or involuntary transfer of beneficiary's interest in the principal is referred to as the "spendthrift" clause, which prohibits the transfer or assignment, whether voluntary or involuntary, of the beneficiary's interest in the trust, until received through distribution.
Rules In a Revocable Trust As To Creditors' Claims: A revocable trust generally does not grant the beneficiary, whose right to interest in the trust is contingent, the right to compel the trustee to pay the principal at the distribution, unless the trust becomes irrevocable by the death of the settlor and the beneficiary remains a beneficiary at that time.
So, any restraint on transfer of principal or "spendthrift" clause in a revocable trust is invalid in this Author's opinion.
The beneficiary's interest is not settled.
Judgment creditors of the beneficiary in a revocable trust cannot compel enforcement until the trust becomes irrevocable and the beneficiary receives the interest in the trust.
As to judgment creditors of the settlor in a revocable trust, if the settlor therein is a beneficiary, the restraint on voluntary or involuntary transfer is likewise invalid, as in irrevocable trust, under Probate Code Section 15304, supra.
So, a judgment creditor of the settlor who is a beneficiary in a revocable trust can enforce judgment on the settlor's interest therein.
Limited Usefulness of Revocable Trust In Asset Protection: Probate Code Section 15304(a), supra, incorporates the "self-settled" trust rule, which invalidates such restraint on transfers to the settlor's transferees or creditors.
If the settlor is not a beneficiary in a revocable living trust, can judgment creditors of the settlor enforce judgments on community property of the settlor transferred to the trust? No, in this Author's opinion, if the revocable trust was validly created and recorded, and the transfer of property to the trust was not in fraud of creditors.
This legal opinion is unaltered by the right of the settlor to modify (amend) or even terminate the revocable trust at will, nor by the Internal Revenue rule that revocable trusts do not need to file separate income tax returns (unlike irrevocable trusts), income of the revocable trust is picked up by the settlor in his/her income tax return, and his/her social security number is used in trust investments.
Bankruptcy Treatment of Trust: For bankruptcy purposes, property or funds held in trust for another (as in irrevocable trust) are not property of the settlor/trustee-debtor's estate, under Section 541(a) of the Bankruptcy Code.
In the same manner, beneficial interests of beneficiaries in discretionary trusts and spendthrift trusts, including ERISA-qualified retirement plans, are not property of the bankruptcy estate of the settlor/trustee-debtor, under Section 541(c) of the Bankruptcy Code.
In the case of a revocable trust, wherein the settlor is not a beneficiary, it is this Author's opinion that the trust property or funds are not property of the estate of the settlor/trustee who has sought bankruptcy protection.
But because excluded property is not to be confused with exempted property in bankruptcy, the trust property should be included in the bankruptcy schedules (Schedules A and B) and in the Statement of Financial Affairs, as property held in trust for another by the settlor who is also the trustee in the revocable trust.
(The Author Roman P Mosqueda has handled civil litigation on revocable trusts and living trusts in bankruptcy.
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