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Ninth Circuit Applies California Supreme Court's Holding in Carmack v. Reynolds, Holding That Spendthrift Trust Distributions Are Property of the Estate and Confirming the Types of Distributions Which Need to Be Turned Over

On August 16, 2017, the Ninth Circuit Court of Appeals, more than two years after it issued an order certifying a probate question to the California Supreme Court, held that a bankruptcy estate is entitled to the full amount of spendthrift trust distributions due to be paid as of the petition date. However, based on the California Supreme Court's opinion in Carmack v. Reynolds, 391 P.3d 625, 628 (Cal. 2017), the Ninth Circuit confirmed that the estate may not access any portion that the beneficiary needs for his/her support or education (so long as the trust specifies that is the purpose of the funds). See also Cal. Prob. Code § 15302. The Ninth Circuit further held that the bankruptcy estate may also reach 25 percent of expected future payments from the spendthrift trust, reduced by amounts needed by the beneficiary to support himself/herself and his/her dependents. Carmack v. Reynolds, 391 P.3d at 632; Cal. Prob. Code § 15306.5.

The Ninth Circuit's recent holding came after a lengthy appeal process which began with an appeal from the United States Bankruptcy Court for the Central District of California to the Ninth Circuit Bankruptcy Appellate Panel in mid-2011. On March 9, 2015, in Frealy v. Reynolds, 779 F.3d 1028 (9th Cir. 2015), the Ninth Circuit Court of Appeals issued an order certifying the following question to the California Supreme Court: "Does section 15306.5 of the California Probate Code impose an absolute cap of 25 percent on a bankruptcy estate's access to a beneficiary's interest in a spendthrift trust that consists entirely of payments from principal, or may the bankruptcy estate reach more than 25 percent under other sections of the Probate Code?" Such "other sections" included California Probate Code Sections 15301(b) and 15307.

On March 23, 2017, in Carmack v. Reynolds, 391 P.3d 625 (Cal. 2017), the California Supreme Court responded and held that, under California law, a judgment creditor or a Chapter 7 trustee can seize all principal of a spendthrift trust that is currently due and payable by the trustee of a spendthrift trust to a beneficiary plus 25 percent of the principal payments that are expected to be made in the future, except to the extent those payments are necessary for the beneficiary's education or support.

To see the full Memorandum (which includes Carmack v. Reynolds as an appendix), please click here.

If you have any questions on the above, please contact Rika Kido or any of the attorneys at Shulman Hodges & Bastian LLP at 949-340-3400.

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