California Supreme Court Decision Limits Protections for Spendthrift Trusts

When a beneficiary of a spendthrift trust files for bankruptcy, a question arises as to the extent to which the beneficiary’s interest in the trust is included in his or her bankruptcy estate and thus may be administered by a bankruptcy trustee. This answer is often determined by state law. Although beneficial interests in spendthrift trusts are a type of property that are not included in a bankruptcy estate pursuant to 11 U.S.C. § 541(c)(2), bankruptcy trustees have long relied upon California Probate Code § 15306.5(f) to assert that bankruptcy trustees, in their position as hypothetical lien creditors pursuant to 11 U.S.C. § 544, may receive up to 25 percent of the debtor/beneficiary’s expected future payments in a spendthrift trust.