Take-Away: Recently the South Dakota Supreme Court held that an order of a California state court that required the direct payment by the trustee for the beneficiary’s child support obligation was an enforcement mechanism and thus not entitled to the protection of the Full Faith and Credit Clause of the U.S. Constitution. This is just one of many cases where some courts ignore the protections of a spendthrift provision is an irrevocable trust created by a third-party.

Case: In the Matter of the Cleopatra Cameron Gift Trust dated 5/26/1998 and the Cameron Family Exempt GST Trust FBO Cleopatra Cameron dated 12/20/96, as amended, 2019 S.D. 35, 931 N.W. 2d 244

Overview: The facts in this case entail the change in situs of a California trust to South Dakota, with multiple changes in professional trustees along the way. I’ll try to skip most of those facts as they are not germane. Suffice it to say that the last professional trustee in that long chain of trustees finally raised the Full Faith and Credit argument that the South Dakota Supreme Court accepted.

Facts: Art established a fully discretionary spendthrift ‘Family Trust’ for his daughter, Cleopatra. That Trust later got divided when Art died, into Exempt and Non-Exempt subtrusts; in effect, Cleopatra was the beneficiary of three separate trusts. For this summary, all three trusts will be treated as a single Trust. Cleopatra received $40,000 a month from the Trust (suggesting her lifestyle was commensurate with her name!) In 2005 Cleopatra became embroiled in a divorce. Her husband was given sole custody of their children. Cleopatra was ordered to pay $8,863 a month in interim child support, $14,761 a month in interim spousal support, and $50,000 for her husband’s current legal fees. Later Cleopatra, through the Trust,  was ordered to pay her husband’s attorneys another $100,000.  The Trust was formally joined as a party to Cleopatra’s divorce proceeding in order to ensure that the Trust would pay Cleopatra’s support and attorney fee obligations. This order was authorized by California’s Probate Code, which allows a court to order a trustee to satisfy a support judgment out of future payments that the trustee, pursuant to the exercise of the trustee’s sole discretion, determines to make to or for the benefit of the beneficiary, even when the trust beneficiary-obligor, does not have the ability to compel distributions, i.e. distributions are in the trustee’s sole discretion. Prior California court decisions determined that a divorce court may overcome the trustee’s discretion when there is an enforceable child support judgment that the trustee refuses to satisfy. Lots of wrangling occurred in the California divorce court with orders imposed on the ‘joined’  Trust which followed paid Cleopatra’s support obligations.

In 2012 Cleopatra moved the situs of the Trust to ‘trust friendly’ South Dakota pursuant to a power to change situs that was expressly given to her under the trust instrument. Consequently, the migration of the Trust from California to South Dakota was simply an exercise of that power to change situs expressly given to Cleopatra.

A South Dakota trial court promptly modified Cleopatra’s child support obligation after the trust’s ‘arrival’, but that order did not refer either to the 2010 final judgment of divorce entered in California, or the Trust as a ‘joined’ party in the California divorce proceedings. However, the Trust (in South Dakota)  continued to pay Cleopatra’s child support obligation after the move. After this, multiple corporate trustees came and went as the trustee of the Trust, but each still made Cleopatra’s child support payments from the Trust, until that is the ‘last’ corporate trustee came onto the scene.

Constitution: The U.S. Constitution’s Clause provides that Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. [Codified at 28 U.S.C. Section 1738 (2013).]

Trustee’s Claim: In 2017, the newest corporate trustee of the Trust sought a declaration in South Dakota courts with regard to whether the Trust was prohibited from making any child support payments to Cleopatra’s former husband and children due to the Trust’s spendthrift clause.

Trial Court: The South Dakota trial court held that South Dakota law controlled the enforceability of the California state court’s order with regard to Cleopatra’s child support obligation. Specifically, it held that the California court order was in contravention of the Trust’s spendthrift limitation, and thus that California order was not entitled to full faith and credit by South Dakota courts.

Supreme Court: The U.S. Supreme Court has noted that there are limits to the Full Faith and Credit Clause. Referring to an earlier U.S. Supreme Court decision, the South Dakota  Court cited a portion of that ‘limitation’ decision: “Enforcement measures do not travel with the sister state judgment as preclusive effects do; such measures remain subject to the evenhanded control of forum law….’Evenhanded’ means only that the state executes a sister state judgment in the same way that it would execute judgments in the forum court.” Baker by Thomas v. GMC 522 U.S. 222 (1998).

  • The South Dakota Supreme Court found that South Dakota law prohibits attachment of a beneficiary’s interest in a discretionary trust where there is a spendthrift clause.
  • In addition, the  Court noted that South Dakota limits the circumstances where an exception creditor may recover from a debtor-beneficiary of a third party spendthrift trust. Like Michigan’s definition of a wholly discretionary trust, [MCL 700.7103(d); 700.7505; 700.7815(1)] Cleopatra’s interest in the Trust was not considered a property interest under South Dakota law. While Michigan recognizes exception creditors to a support trust [MCL 700.7504(1)], there are no exception creditor rights associated with a beneficiary’s interest in a discretionary trust.
  • The Court was very careful to note that the California judgment and orders on Cleopatra’s support obligations were not affected by this South Dakota ruling. It was only the means to enforce the California child support order that was not entitled to full faith and credit in South Dakota. Thus, Cleopatra’s obligations to pay child support would remain in force and subject to the jurisdiction of the South Dakota trial court, but the Trust could not be ordered to pay her child support obligations.

Uniform Trust Code: Repeating what has previously been reported, under the Restatement (Second) of Trusts, a discretionary beneficial interest was deemed not to be an enforceable right to any income or principal from the trust at common law. As such, a beneficiary cannot force any action by the trustee, nor is the beneficiary’s interest assignable, thus leading to the conclusion that a discretionary beneficial interest is not a property interest, just a mere expectancy. The Restatement (Third) of Trusts, rewrote the definition of a discretionary trust and as a result it greatly reduced its asset protection features (or in the cynical opinion of some commentators, changed, not summarized, the common law.) As a generalization, the Restatement (Third) was incorporated into the Uniform Trust Code. While Michigan has adopted the Uniform Trust Code, the definition of a discretionary interest in a trust, and the common law view that it is not a property interest, was adopted as part of the Michigan Trust Code. To that extent, the Michigan Trust Code departs from the Uniform Trust Code by providing a higher  level of creditor protection with a discretionary trust.

Trend: The erosion of the protection provided by a third-party spendthrift trust seems to be a ‘hot topic’ in courts across the country these days. Examples of other court decisions that permitted a divorce court to compel the trustee of a discretionary spendthrift trust to pay the beneficiary’s child and spousal support obligations include Levitan v. Rosen, Mass. Appeals Court, no. 18-P-847 (May 6, 2019) and Berlinger v. Casselbery, 133 S. 3d 961 (Fla. 2d Nov. 27, 2013). In contrast, in Michigan we have the recent Anton v. Gualtieria, Mich Ct. of App. LC No. 2016-219737- TV (March 19, 2019) decision, where a third-party discretionary spendthrift trust was not available to satisfy the beneficiary’s obligation to pay child and spousal support arrearages.

Conclusion: California’s statute that permits a divorce court to over-ride a spendthrift trust limitation may be unique to California. [So may be the provision in the Family Trust that expressly gave Cleopatra the unilateral right to change the situs of her trust which, with hindsight, enabled her to protect her beneficial interest in the trust simply by moving it from California to ‘trust friendly’ South Dakota. It will be interesting to see if other states attempt to follow California’s lead by creating statutory authority that enable courts to ignore the legal effect of a trust’s spendthrift clause.