Obtaining Discovery of Trusts, Their Assets, & Income to Prove Cash Flow Available for Child and Spousal Support: the Black Letter Law & Practical Considerations

• Publication year: 2021
• Author: Alphonse F. Provinziano, CFLS

Obtaining Discovery of Trusts, Their Assets, & Income to Prove Cash Flow Available for Child and Spousal Support: The Black Letter Law & Practical Considerations

Alphonse F. Provinziano, CFLS

Wealthy families often set up trust funds for children in order to benefit from tax savings, private transfers of wealth, and to allow parents to control the funds going to their children. Such trusts are intended to protect the beneficiary from scrutiny and can be a shield for publicly holding assets that are much more available to the public eye.¹ Trusts are often thought of as somewhat untouchable in family law cases, and that if someone has assets in a trust or is a beneficiary of trust, that they do not have to disclose the assets held in a trust and do not have to provide the information, often asserting confidentiality and privacy provisions for beneficiaries of a trust. Nevertheless, there often is a significant community property interest in trusts, as well as income bearing assets hidden inside of trusts that could be available as cash flow for support. The purpose of this article is to demystify the claims that trusts are somehow impervious to discovery, when, in fact, trusts are subject to discovery, both the assets in the trust and the information regarding the trust. If there are legitimate concerns regarding confidentiality and privacy, the court can impose appropriate protective orders and engage in an in camera review process.

What is a Trust?

In California, trusts are governed by the Probate Code Division 9 (sections 15000 et seq.). Chapter 1 begins at sections 15200 and addresses the Creation and Validity of Trusts. Chapter 2, beginning at sections 15300, addresses Restrictions on Voluntary and Involuntary Transfers, which is relevant to the use of trusts in family law cases. Probate Code section 15300 states:

[e]xcept as provided in Sections 15304 to 15307, inclusive, if the trust instrument provides that a beneficiary's interest in income is not subject to voluntary or involuntary transfer, the beneficiary's interest in income under the trust may not be transferred and is not subject to enforcement of a money judgment until paid to the beneficiary.

Probate Code section 15301 goes on to state that the beneficiary's interest in principle is also subject to the same limitations. This means that under a "spendthrift trust," the beneficiary cannot assign potential distributions as security and prevents third-party judgment creditors from satisfying debts with the trust's assets until they are paid to the beneficiary.

Regarding child support, this is only addressed in the Probate Code when it comes to enforcement of court orders under section 15305. There is nothing in the Probate Code to address establishing support orders against a beneficiary. Section 15305 authorizes a trial court to order a trustee to satisfy an existing support order even where there is a discretionary trustee or a spendthrift clause (section 15305(d)), but only (1) pursuant to section

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15305(b), where the beneficiary has the right to compel distributions, or (2) pursuant to section 15305(c), where the trustee has exercised discretion to issue distributions, and all subject to the requirement that it is equitable and reasonable to do so.

A recent case interpreting this Probate Code section, Pratt v. Ferguson, found that the shutdown clause typically found in spendthrift trusts did not defeat the claims of a support creditor.² In this case, the court had discretion under section 15305 to order the trustee to make distributions to satisfy the judgment based on the circumstances and considering what was equitable and reasonable.

Are Assets in a Trust and Cash Flow Derived From Trusts Discoverable for Purposes of Child Support and Spousal Support?

Although trusts are governed by the Probate Code, the Family Code and the Code of Civil Procedure can also affect trusts.

Family Code section 4053 makes a parent's first and principal obligation the support of their minor children, as the parties cannot waive child support. Parents' respective support obligations are determined according to their financial circumstances, each to pay according to their ability, with a statutory mandate that children should share in the standard of living of both parents. Child support may, therefore, appropriately improve the standard of living of the custodial household to improve the lives of children.

In defining income, Family Code section 4058 includes "trust income." However, this does not completely open the door on discovery, as the general rule is that child support is paid from present earnings and a parent need not invade assets or liquidate preexisting assets to pay child support. As an example, in the decision Pearlstein v. Pearlstein, the court found that the unrealized value of stock was capital, and not gross income.³ Even if those shares...