IRRECONCILABLE DIFFERENCES? FAMILY LAW DISCOVERY AND TRUSTS
Compelling public policies embedded in the California Family Code (“FC”) impact rights and responsibilities of married and unmarried couples and the lives of children. For the family law practitioner, there are competing public policies outside of the Family Code statutory framework which require analysis of issues that at first blush may seem straightforward. One such question arises when a party in a family law proceeding involving child or spousal support is the beneficiary of one or more trusts that might be a source of income on which a support order could be based.1 Discoverability of information concerning the assets and/or income of such trusts is where competing public policies intersect and potentially collide. In these cases, it is not just the Family Code dictates but also the public policies of the Probate Code (“PC”) and the Code of Civil Procedure (“CCP”), as articulated in statutes and case law interpreting those statutes, which play significant roles in determining the extent to which trust information is discoverable.
Turning first to the Family Code and questions of child support, strong public policy allows the diligent, if not aggressive, investigation into sources of income for child support. FC section 4053 makes a parent’s first and principal obligation the support of his/her minor children. Parties cannot waive child support.2 Parents’ respective support obligations are determined according to their financial circumstances, each to pay according to his/her ability, with a statutory mandate that children should share in the standard of living of both parents.3 Child support may, therefore, appropriately improve the standard of living of the custodial household to improve the lives of children.4
What, then, of a payor with a beneficial trust interest? FC section 4058 specifically defines “income” for child support as including “trust income.” Notwithstanding, this definition itself does not open an unlimited discovery door and cannot be so broadly construed as to do away with all other considerations. Among these is the general rule that child support is paid from present earnings and a parent need not invade assets or liquidate pre-existing assets to pay child support.5 We see this rule in the 2006 Pearlstein6 decision, where the unrealized value of stock was held to be capital, not FC section 4058 gross income. Were shares of stock sold for the purpose of reinvestment in income-producing assets, any resulting gain would not be income, but the mere replacement of one capital investment with another,7 and thus not available for support purposes.
Further, for purposes of calculating child support, case law including Marriage of Alter, Marriage of Scheppers, and County of Kern v. Castle,8 teaches that the principal amount of a one-time, lump sum gift or inheritance is not income available for support, although the rents, interest, or dividends generated thereby are, and recurring gifts may likewise be so designated in the discretion of the trial court.
The existence of a beneficial interest in a trust therefore reasonably opens a line of inquiry when child support is at stake, but what first appears as a clear public policy to maximize child support payments from any possible source is ultimately subject to limitations, as discussed further below.
On the spousal support side, where the statutory prerequisites of “need” and “ability to pay” are met, spouses are required to continue financially supporting each other after their marriage has ended, in order to ensure that former spouses do not become burdens on the state. This public policy, however, is tempered by the FC section 4320 factors governing the support analysis, which give courts much greater discretion in awarding spousal support than child support and permits limits on duration of the obligation itself,9 including limits imposed by passage of time sufficient to substantiate downward modification or even termination.10 While there is no statutory or common law definition of income akin to FC section 4058 for spousal support purposes, there is also nothing in the law that would exclude trust income from an analysis of available income where the issue is solely spousal support.
In other words, there is no separate rule setting forth when assets held in trust, and income generated by those assets, are deemed available as the source of support payments, whether child support or spousal support. Instead, these assets and income are considered within the statutory and case law framework that presently exists for all sources of support payments, subject to trust law where relevant.
Significantly, trusts—like corporations—are creatures of state statutes, the Internal Revenue Code, and IRS Regulations, and consequently are highly technical in their requirements, which are strictly construed. There are many kinds of trusts, including revocable and irrevocable trusts, asset protection trusts, spendthrift trusts, support and education trusts, discretionary and non-discretionary trusts, grantor trusts, and non-grantor trusts. It is not within the scope of this article to define various trusts or discuss any specific types. Any practitioner unfamiliar with trusts who is confronted with a case where a trust is involved is urged either to consult with an attorney well versed in trust and estates law or to undertake the responsibility to become sufficiently knowledgeable to render advice in this area so as to not risk the potential of malpractice.
The family law practitioner in a case whose fact pattern includes one or more trusts nonetheless requires some familiarity with trust terminology and the Probate Code. Trusts have certain commonalities—they have a Trustor (also referred to as the “Grantor” or “Settlor”), who creates the trust, one or more Trustees who govern the trust based upon the powers granted in the governing trust instrument, and one or more Beneficiaries for whose benefit the trust assets are held. The overriding general principle of trust law is that the intent of the Trustor is to be given effect.11 This is because a donor has the right to give his/her property to another on any conditions he/she may impose, as such a gift takes nothing from prior or subsequent creditors of the Beneficiary to whom such creditors previously had the right to look for payment.12 A Trustee has the right and duty to protect and defend title for any property in the trust estate.13
Trusts in California are governed by PC Division 9 (§§ 15000 et seq.). PC sections 15300 et seq. sets forth restrictions on voluntary and involuntary transfers from a trust. For example, a spendthrift trust prevents a Beneficiary from assigning potential distributions as security and prevents third-party judgment creditors from satisfying debts with assets held in trust for that Beneficiary until paid to the Beneficiary.14 If a spendthrift trust is also a support and/or education trust, income or principal can only be reached by a judgment creditor to the extent some portion of the undistributed trust income is not needed for support and education of the Beneficiary, and then, only where a discretionary Trustee has exercised his/her discretion to declare a distribution in excess of such support and the beneficiary has been paid. To the extent the Trustee distributes the whole, all monies in the hands of the beneficiary are potentially available to the judgment creditor. (PC §§ 15302, 15307). Per the Probate Code, station in life is the standard for exercise of discretion regarding distributions for the Beneficiary’s support.15
Child and spousal support issues are addressed in the Probate Code only when it comes to enforcement of court orders for such support; nothing in the Probate Code is found regarding establishment of support orders against a trust Beneficiary. Those are governed by the Family Code, which includes trust income as income, ante. If a judgment is for child or spousal support, PC section 15305, originally enacted in 1986, has elevated the judgment creditor to preferred creditor status. Generally, a Beneficiary should not be permitted to enjoy the trust interest while neglecting to support his/her dependents,16 and a minor’s right to support cannot be defeated by a spendthrift trust or a support trust.17 PC 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 (§ 15305(d)), but only (1) pursuant to section 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.18
Only one published California case to date interprets PC section 15305: Ventura County Dept. of Child Support Services v. Brown.19 This case, addressing solely the issue of enforcement of extant support orders, is sufficiently fact-specific that it must be cautiously considered. In this case, the public policy of payment of child support outweighed the public policy that an owner of property, such as a trust settlor, may dispose of such property as he/she pleases and may impose spendthrift restraints on disposition of the income, subject only to the exercise of discretion by a trustee.20 The relevant facts of the case are that the support payor had seven children with three different mothers and failed to make court-ordered child support payments for fifteen years.21 He became entitled to distributions from a family trust; the settlor was his mother. One of his children’s mothers and the County’s Department of Child and Family Services, on behalf of six of the seven children, sued the trustee to force him to make payments of child support arrearages as well as future payments from the trust estate. The court held that although under California law a court does not have jurisdiction to order a distribution by the discretionary trustee absent an abuse of discretion by that trustee, the discretionary trustee in this case abused his discretion as he, in bad faith, exercised that discretion to distribute no income to the child support judgment debtor-beneficiary, with the intent to avoid enforcement of the child support judgments, thus rendering the trustee’s discretion subject to control of the court.22 The court cited PC section 16081(a) which imposes the duty of good faith on a trustee.
The lesson of the Ventura County case is that under the right set of facts and circumstances, a trustee can be forced to exercise discretion to enforce support judgments, but such facts and circumstances are rare. Nothing in the case suggests that it can reliably be cited as giving the court jurisdiction to initiate support orders against a trust and it could be considered misleading the court to do so.
Turning to discoverability of trust income and assets, the analysis likewise rests on competing policies. Strong public policy favoring discovery rights in litigation matters is reflected in case law liberally construing discovery statutes in favor of disclosure and upholding the right to discovery wherever reasonable and possible.23 The purpose of discovery is to obtain all facts relative to a claim or defense.24 CCP section 2017.010 permits the discovery of any matter, not privileged, relevant to the subject matter of the pending action or motion if it is admissible or appears reasonably calculated to lead to discovery of admissible evidence. This is both broad in that it allows a request for even inadmissible evidence if it will lead to admissible evidence, but also limited in that requested information must be relevant to the case at hand.25 “Relevant to the subject matter” includes information that might reasonably assist a party in evaluating the case, preparing for trial, or facilitating settlement.26
Juxtaposed with discovery rights is the strong public policy protecting individual privacy rights.27 The court must balance the right to discover relevant facts with the right of non-parties to maintain reasonable privacy regarding their financial affairs.28 In evaluating claims for protection of confidentiality, courts are vested with discretion. They must consider and weigh inter alia the purpose for which discovery is sought, the effect disclosure will have on the parties and trial, the nature of objections, and the ability of the court to make alternate orders for partial disclosure, disclosure in another form, or disclosure provided the requesting party meets specified burdens or conditions just under the circumstances. Where possible, a court should impose partial limitations rather than denial. The court can accommodate both disclosure and confidentiality by deleting names, sealing the information except on further order of court, and holding in camera hearings.29
In balancing these competing policies in a family law case involving community property rights, the court held in the oft-cited Schnabel opinion that any discovery must be tailored to protect the interests of the requesting party in obtaining a fair resolution of the issues, while not unnecessarily invading the privacy of the non-party, including, on request, by protective orders.30 Simply put, and frequently reiterated, parties cannot use discovery for improper fishing expeditions.31
Given the foregoing, practitioners in a family law matter involving child or spousal support where one or both parties have beneficial trust interests are faced with analyses regarding whether and what information regarding a trust is practically, realistically, and appropriately obtainable. If representing the party seeking support from a payor-beneficiary, the question is how to propound discovery to ensure it is narrowly tailored to avoid protective orders and/or discovery sanctions. If representing the support payor, the question becomes how to respond with sufficient information to avoid motions to compel and attendant discovery sanctions.
Whichever party one represents, relevance of the information sought is key to the overall analysis. It is simplistic and incorrect to assume that all information about the assets and income of a trust is relevant in a support case. It is not the extent of the money or other assets residing in the trust, nor income generated by the trust, which control, but rather to what trust assets or income does the beneficiary actually have access. This important distinction lies at the heart of the holding in Marriage of Williamson, decided in 2014.32
In Williamson, husband was the beneficiary of one of eighteen sub-trusts within a family trust structure involving third party beneficiaries and contingent beneficiaries. During the parties’ lengthy marriage they enjoyed a high marital standard of living funded by husband’s tax-free distributions from the one sub-trust plus other parental gifts. Wife sought discovery concerning the trusts in the dispute over child and spousal support, where husband had low paying employment and the otherwise recurring parental gifts were now terminated. Notwithstanding a dramatic decrease in husband’s ability to pay support, as compared to the marital standard of living, the trial court on husband’s motion for protective order limited discovery of only the express language in the family trust specifically allocating income to husband and describing his interest in the trust, further redacted to prevent disclosure of third party beneficiaries and contingent beneficiaries, as well as, most significantly, of trust assets.33 In an earlier case likewise involving the scion of a wealthy family who was claiming a dramatic decrease in income available for support, Marriage of DeGuigne,34 Justice Corrigan pointed out that notwithstanding known family trust assets of an estimated $3.8 million, the assets were not under the control of the husband-payor; thus, the trust assets were irrelevant in the support calculus. The Court of Appeal affirmed the protective order in Williamson, stating that discovery may be limited when the intrusiveness of the request outweighs the likelihood that the information sought will lead to the discovery of admissible evidence, citing CCP section 2017.020(a), and in line with the reasoning of DeGuigne.
The Williamson holding reflects not only the conflict between rights of discovery and rights of privacy for third parties, but also limitations on sources of support despite otherwise broad public policy affirming support obligations. Williamson serves as a limiting roadmap in our support cases involving trusts.
Note that the party seeking support orders in Williamson did not even obtain the entirety of the governing trust instruments, although there is no discussion in the opinion of the full extent of discovery sought. The issue of sharing the governing trust instrument does merit further attention by counsel for both parties, insofar as it may be critical to determining the interest of the beneficiary in the trust, whichever side of the argument one is on. The history of distributions alone may not tell the entire tale, but that information is clearly relevant. The trust instrument not only identifies the grantor but it may also provide information not otherwise obtainable as to the grantor’s intent, the purposes of the trust, the full extent of the trustees’ powers and discretion, any future beneficiaries such as the parties’ children, and how and when distributions may be made. This type of information may then be relevant to determining what income is or is not available to the beneficiary, and thus discoverable under Williamson. For the party representing the trust beneficiary, disclosure of the actual trust instrument subject to confidentiality protections may be helpful in showing the unreasonableness and lack of relevance of further inquiry into trust income and assets.
The seminal questions on both sides involve the extent of the beneficiary’s control over distributions and whether there are third parties whose privacy rights must be protected. For example, in assessing the beneficiary’s control: Are distributions automatic or discretionary? Is there any limit as to amount or purpose? Is the trustee independent of the beneficiary? Is the trust a support trust and/or a spendthrift trust? Who has ultimate decision-making authority over distributions? Is the grantor/settlor also the beneficiary? What is the history of distributions? Have any been requested and denied?
With respect to other beneficiaries and terms of the trust instrument relating only to them, under Williamson this information is not relevant in discovery, and must be redacted. If there are provisions regarding the interests of the beneficiary’s children, and if the grantor’s intent was to create a generation-skipping trust to avoid taxation, it may be arguable as in the Ventura County case that the grandchildren are the intended beneficiaries of the trust, and a discretionary trustee abuses discretion by failing to declare a distribution out of which a child support judgment creditor can satisfy an existing court order. Such an argument may give rise to narrow discovery relevant to that issue. This argument, however, does not appear persuasive where the request is for a support order based ab initio on the possibility of future distributions that the discretionary trustee will thereafter have to be ordered to make. The exceptional circumstances of the Ventura County case are absent in such a fact pattern.
In all, the tension between the policy of liberal discovery and the right of privacy in family law support cases involving beneficial trust interests appears to weigh heavily in favor of third party privacy rights, while it appears nonetheless to be an area of developing law. If there is “good cause” in the form of beneficiary control, trustee relatedness, or bad faith, discovery rights will arguably be greater. It is doubtful, however, that regarding this most private institution of wealth transfer, “good cause” based on speculation or mere argument can be shown for discovery of the assets or income of a trust whose beneficiary is the payor or recipient of child or spousal support, but who cannot compel distributions and/or who has no history of receiving trust distributions. Likewise, under the present state of the law, it is unlikely that broad discovery inquiries akin to fishing expeditions concerning the trust or trustee will be permitted, no matter the disparity in income or seeming inequities between the parties themselves.
* Terry A. Steen made invaluable contributions to this article which are much appreciated by the authors.
1 We do not refer here to trusts created by the parties together during marriage into which only community assets have been transferred and which presumably will be revoked upon termination of the marriage.
2 Marriage of Hamer, 81 Cal. App. 4th 712 (2000).
3 FC § 4053.
5 Mejia v. Reed, 31 Cal. 4th 657, 570-71 (2003).
6 Pearlstein v. Pearlstein, 137 Cal. App. 4th 1361 (2006).
7 Id. at 1375-76.
8 Marriage of Alter, 171 Cal. App. 4th 718 (2009); Marriage of Scheppers, 86 Cal. App. 4th 646 (2001); County of Kern v. Castle,
75 Cal. App. 4th 1442 (2001).
9 FC § 4320.
10 In re Marriage of Wilson, 51 Cal. App. 3d 116 (1975); In re Marriage of Schmir, 134 Cal. App. 4th 43 (2005). But see, In re Marriage of Edwards, 52 Cal. App. 3d 12 (1975) (Passage of time alone is insufficient to justify termination of spousal support).
11 PC § 21102(a); see also, Booge v. First Tr. and Sav. Bank of Pasadena, 64 Cal. App. 2d 533-35 (1944).
12 Canfield v. Security-First Bank, 13 Cal. 2d 1, 30-31 (1939).
13 For example, an invalid writ levied on exempt property would seriously interfere with trust administration and thus it is the trustee’s duty to defend against such legal action. Hearst v. Hearst, 123 F. Supp. 756, 758 (1954).
+clause (last visited Oct. 7, 2015).
15 PC § 15307; see also, Hearst, 123 F. Supp. at 756, 758; Canfield, 13 Cal. 2d at 30-31.
16 The Law Revision Commission Comment to PC § 15305.
18 Id.; PC § 15305.
19 The Law Revision Commission Comment to PC § 15305; Ventura Cty. Dept. of Child Support Services v. Brown, 117 Cal. App. 4th 144 (2004).
20 Ventura Cty. Dept., 117 Cal. App. 4th at 155 (citing Hurley v. Hurley, 309 N.W.2d 225 (Mich. 1981)).
21 Id. at 147-48.
23 Deyo v. Kilbourne, 84 Cal. App. 3d 771, 781 (1978) (citing Greyhound Corp. v. Super. Ct., 56 Cal. 2d 355, 377 (1961)); Emerson Electric Co. v. Super. Ct., 16 Cal. 4th 1101, 1108 (1997); see also, Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial 2 ¶ 8:812, at 8E-97 (The Rutter Group).
24 Deyo, 84 Cal. App. 3d at 781.
25 CCP § 2017.010.
26 Gonzalez v. Super. Ct. (City of San Francisco), 33 Cal. App. 4th 1539, 1546 (1995).
27 Calcor Space Facility v. Super. Ct. (Orange), 53 Cal. App. 4th 216, 219-223 (1997); Valley Bank of Nev. v. Super. Ct. (San Joaquin), 15 Cal. 3d 652 (1975).
28 Id. at 657-58 n.26.
29 Id. at 658.
30 Schnabel v. Super. Ct., 5 Cal. 4th 704, 714 (1993) (Schnabel I).
31 Calcor Space Facility, 53 Cal. App. 4th 216, 219-223 (1997).
32 Marriage of Williamson, 226 Cal. App. 4th 1303 (2014).
33 Id. at 1319.
34 Marriage of de Guigne, 97 Cal. App. 4th 1353, 1358 (2002).