Children Supporting Themselves? How Sparring Parties in Support Disputes Seek to Use the Family Code to Bypass Trust Protections for Beneficiaries

• Jurisdiction: California,United States
• Author: Michael S. Brophy and Sara Z. May
• Publication year: 2020
• Citation: Vol. 42 No. 3

Children Supporting Themselves? How Sparring Parties in Support Disputes Seek to Use the Family Code to Bypass Trust Protections for Beneficiaries

Michael S. Brophy and Sara Z. May

Michael S. Brophy is a partner in the trust, estate and inheritance disputes team at international law firm Withers and is the U.S. Regional leader of the Private Client and Tax Division. Michael has extensive experience representing individuals, families, charities, corporate trustees, private professional fiduciaries and creditors in litigation involving complex trusts and estates. Michael's diverse practice includes will and trust contests, accounting and business disputes, breach of duty actions, elder abuse and conservatorship disputes, document interpretation matters, and other contested probate and fiduciary-related matters.

Sara Z. May is an associate in the trust and estate litigation team at Withers and is based in the Los Angeles office. Sara's practice focuses on complex trusts and estates litigation, trusts and estate administration, and conservatorship and guardianship matters. She advises high net worth clients in family law matters including property issues, spousal support, child support and custody.

California family courts have broad powers under the Family Code to consider the nature of assets held directly or indirectly for the benefit of spouses and parents when determining the amount and source of support obligations. Those powers are tested, however, when the assets in question are held in trust structures governed by the California Probate Code and other state trust laws. While the law is clear on how to handle certain types of trusts in certain situations, such as when a spouse holds assets in a revocable trust for his or her own benefit, it is often less clear to family law practitioners on how the court might consider other trust assets, such as those held irrevocably for the benefit of the children in adversarial support proceedings.

For example, to what extent may a divorcing spouse in a support proceeding pursue assets held in an irrevocable trust established by the other spouse to benefit their children at a time when the parties were not restrained by an automatic temporary restraining order ("ATRO")? Should the spouse seeking support seek to invalidate the trust, force the trust to make distributions, hold the trust jointly and severally responsible for support obligations, or simply seek to have the trust principal or income considered in the DissoMaster report? Understanding the legal landscape for managing these issues is the first key step in crafting a strategy to pursue or protect trust assets from support consideration. The trustee, acting in his or her fiduciary capacity, represents a trust in legal proceeding as a separate party entitled to separate counsel. Involving third party trusts in support disputes add another level of complexity and cost, and in some circumstances even require parallel proceedings before the California Probate Court.

This article acts as a road map for considering these issues. We first explore the trust fundamentals that are commonly involved in dissolution proceedings. Trust types and party relationships are pivotal factors in considering how the trust may be impacted by a support battle. Next, we consider how the family courts generally handle trusts where one of the spouses is the beneficiary, the trustee, or has some other direct or indirect interest in the trust. We then consider the difficult question of when it is appropriate for family courts to consider trusts created for the benefit of the children in support proceedings. Finally, we will consider other strategy considerations, including jurisdiction, tax, and ethical issues.

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I. TYPES OF TRUSTS POTENTIALLY AT ISSUE WHEN DETERMINING SUPPORT

A. Trust Fundamentals

To understand how a "trust" might impact support in dissolution proceedings, you must first understand trust fundamentals. Simply speaking, a trust is a legal arrangement by which title to property is held by one person, the "trustee," for the benefit of another, the "beneficiary." The trust creator is called the "settlor," but is also referred to as the "trustor" or "grantor." A settlor's creation of a trust divides title to transferred property, with legal title in the trustee and equitable title in the beneficiary. Trust lawyers utilize many terms to characterize different trust categories.

1. Express versus Implied Trusts

California law recognizes both express and implied trusts. "Express" trusts are created by the settlor's intentional action, and "implied" trusts, such as "resulting" and "constructive" trusts, are recognized by law regardless of intent.¹ Express trusts may be either "private" trusts, which have specific persons designated as beneficiaries, or "charitable" trusts, which are established for charitable purposes and need not designate a specific ascertainable beneficiary. The California Attorney General supervises charitable trusts, and the inclusion of any charitable trust in dissolution matters will likely require notice to, and potentially the involvement of, the Attorney General. In family law matters, however, most disputes involve express private trusts.

2. Testamentary versus Living Trusts

Trusts are also classified as either "testamentary" trusts, or "inter vivos" or "living" trusts, depending on whether they become effective after the death of the settlor or during his or her life. Family law matters involve both testamentary and living trusts, as both types of trust -when effective - may impact support issues in a dissolution matter.

3. Revocable versus Irrevocable Trusts

An important consideration is whether a trust is, in whole or in part, classified as "revocable" or "irrevocable." A revocable trust typically permits the settlor, when competent, to amend or completely revoke a trust. An irrevocable trust typically prohibits the settlor from revoking the trust and eliminates or significantly limits the settlor's ability to amend the trust terms. In many estate planning scenarios irrevocability results in favorable tax treatment.

During the time that a trust is revocable and the person holding the power to revoke the trust is competent, that person and not the beneficiary, has the rights afforded beneficiaries.² In support matters, the issues of revocability and trust control are paramount to determining whether a spouse has an enforceable interest in trust held assets that should be considered in support proceedings.

B. Probate Court's Exclusive and Concurrent Jurisdiction Rules

In addition, the Probate Code's special jurisdictional and venue rules may impact how a party approaches issues of trust administration in support disputes. The Probate Code sets forth specific rules governing trust proceedings, including provisions relating to jurisdiction and venue, notice, and petitions relating to the internal affairs and existence of trusts.³ In determining jurisdiction and venue in trust proceedings, "the principal place of administration of the trust" is defined as the usual place where the day-to-day activity of the trust is carried on by the trustee or the trustee's representative who is primarily responsible for the trust's administration.⁴ This means that a family law matter and a trust matter may have different proper venues.

The Probate Code states that the superior court having jurisdiction over a trust has exclusive jurisdiction of proceedings concerning its internal affairs.⁵ This "probate division" also has concurrent jurisdiction over proceedings to determine the existence of the trust, actions and proceedings by or against creditors or debtors of the trust, and other actions and proceedings involving the trustee or trustees and third persons.⁶ Trustees also regularly represent trusts in non-Probate Code matters without triggering the exclusive jurisdiction of the probate division. For example, family courts may join trusts as parties to matrimonial matters in family court in enforcement actions in situations that do not involve internal trust administration.⁷

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C. Typical Parent/Child Roles in Trusts

It is also important to scrutinize how the players in a matrimonial dispute are related to any trusts at issue. Understanding a spouse or child's role and respective rights and responsibilities under the trust and governing trust law must occur first before understanding how those roles interplay with family law and established support considerations.

1. Spouse/Parent(s) as Settlors

Family courts generally treat assets held in revocable trusts settled by one or both of the spouses in a dissolution matter in the same manner as if the assets had not been transferred to the trust. Transmutations reflected in the trust language or in separate documents may still be valid, but title transfer is ignored as the power to revoke permits the spouse access to the funds for both dissolution and support purposes.

2. Spouse/Parent(s) as Trustees

While a spouse may hold legal title to an asset as trustee, the spouse does so in a fiduciary capacity. Unless there are fraudulent transfer or equitable issues in play, the family court typically does not consider assets held in trust by a spouse or parent in a support scenario unless one of the spouses is either the settlor or the beneficiary, or when the trust itself is established to address support.

3. Spouse/Parent(s) as Beneficiaries

A family court's broad authority relating to family support obligations allow it to consider the assets of a trust benefitting a spouse/parent when determining either spousal or child support.⁸ The Family Code considers all sources of income to a parent, including income received from a trust.⁹ Although it is well-established that regularly distributed trust income received by a parent is considered when determining income available for support, it is less clear how to handle sporadic distributions. As discussed below, interests in discretionary...