Dad created a California trust for his benefit during his lifetime. At his death, the trust divided into separate shares for his children, of which Cleopatra (“Cleo”) was one. Her trust was further divided into the GST and Non-Exempt GST trust (collectively the “Trust”). The Trust includes a spendthrift provision prohibiting the trustee from making distributions to Cleo’s creditors and granting the trustee sole discretion to make distributions.
Cleo and Chris were married in 2005 (they met in a rehabilitation facility in California according the drafter of the trust) and lived in California with their 2 young children. Chris filed for divorce in 2009 in California and was awarded custody, child support, temporary child support and spousal support obligations. Cleo was receiving $40,000 a month from the Trust. Chris sued in family court to receive distributions from the Trust to satisfy the child support, spousal obligations and attorney fees.
The trustee argued that the spendthrift provisions applied, and the trustee had sole discretion to make distributions. The court noted that a child support obligor is a trust beneficiary who does not have the ability to compel distributions. However, the court can overcome the trustee’s discretion when there is an enforceable support judgment that the trustee refuses to satisfy.
The California family court determined that the exception under California law which allows a court to order a trustee to make direct payment from a spendthrift trust is narrow and depends on the existence of an enforceable child support obligation that a trustee refuses in bad faith to satisfy. The court ordered the trustee to “pay child support, spousal support and attorney fees from Mother’s trust, including any other ordered awards in this action until further order of the [c]ourt”.
(In April 2011 a California Court of Appeal panel reversed the family court order to the extent it required the trust to make direct attorney fee payments to Chris.
In July 2012, Cleo invoked her authority to move the situs of the Trust to South Dakota. Citicorp of South Dakota became trustee in 2014, resigned in 2014 with Bankers Trust Company becoming trustee, resigning in 2016 and Trident becoming trustee. Prior to 2016 all child support obligations were paid from the Trust. It is unclear if spousal support obligations also were paid.
In 2016, Trident refused to pay the child support obligations as “contrary to the trust’s spendthrift provision and the South Dakota’s legislature’s specific intent regarding the rights of creditors against assets of spendthrift trusts”. The South Dakota lower court agreed and concluded the Trust was prohibited by its terms from making any child support payments from the Trust.
The court determined that, while the judgment from California was to be given full faith and credit, the means of enforcing the child support obligation was determined by South Dakota law. Chris appealed.
The Supreme Court of South Dakota determined that the narrow issue was “whether the California direct payment order is entitled to full faith and credit.” The Court then discussed extensively the full faith and credit issue which provides that if a judgment was rendered by a court with adjudicatory authority over the subject matter and persons governed by the judgment, such judgment qualified for recognition throughout the land.
However, there are limitations. Enforcement measures do not travel with sister state judgment. As enforcement judgments do not implicate the full faith and credit considerations, the Court determined that South Dakota placed formidable barriers between creditor claims and a trust fund protected by a spendthrift provision. The South Dakota statute does not provide for exception creditors, such as alimony or child support.
The Court determined that the child support obligation could not be enforced against the trust under South Dakota law.
ADVICE: This case is VERY favorable for those of our clients who want to be certain that a beneficiary’s spouse or children will not be able to “pierce” a third-party spendthrift trust for alimony or child support obligations in South Dakota. Query? Is this good public policy? At least in Florida this would NOT be the result. What is sad in this situation, after discussing with the attorney who did the estate planning, the only people that benefited were the attorneys. Now, with the Trust almost depleted, the children have no source of child support. Apparently, the wife has serious issues with drugs (which is why the spendthrift trust was created in the first place). So, depending on which side you stand, all can agree the children are the ones that lose out.
WORD OF THE WEEK: Full discretion means that a trustee has the complete ability to determine whether or not to make a distribution to a beneficiary. The “full discretion” is not unfettered. Each state may impose limitations such as acting in good faith, together with additional considerations. The document may also give guidelines to the trustee. Full discretion is the best standard to give a trustee if you want to protect the trust from creditors (and providing a spendthrift clause and creating the trust in a state which protects the assets from spousal or child support claims).
GENEROSITY IS A KEY TO HAPPINESS…REACH OUT AND HELP SOMEONE TODAY! 😎