Trusts and Creditors

In Young v. McCoy, 2007 WL 521192 (Cal. Ct. App. 2007), the court held that the Probate Code did not allow a court “to order a trustee to invade the assets of a discretionary trust in order to pay a restitution judgment creditor if the trustee has permissibly exercised its discretion to make no payments to the beneficiary of the trust.”

On July 16, 1997, Richard Young was visiting his mother Lucile at her home in Woodland Hills, California, where his brother Steven also lived. A family argument developed and Steven shot Richard, who survived with injuries.  After Steven’s conviction for attempted murder, he was sentenced life in prison, plus thirteen year. Richard thereafter filed personal injury action against Steven and won a judgment of $1,275,000.

Lucile had created a discretionary trust for the benefit of Steven, where the trustee, Kathy
Jayne McCoy, could make payments to Steven from the interest and principal for his health, support, maintenance, and education.  The trust allowed her to refuse to make such payments if, in her discretion, she determined that Steven did not need them.  The Probate Code only permitted the court “to compel a trustee to pay income or principal to the creditor of a beneficiary if the trustee has, in the exercise of her discretion, determined to make payments to the beneficiary.”  Since Steven was incarcerated, all of his needs were being met by the state, so McCoy determined not to make any payments.

Richard urged the court to consider the legislative history of the statute, saying that “the Legislature intended to make trust assets available for payment of restitution judgments regardless of trustees’ discretion”  However, the court declined to reach the legislative history because the statutory language was clear and unambiguous.  “[The] statutory language clearly and unambiguously limits a court’s power to ordering a trustee to satisfy all or part of a restitution judgment only from future payments of trust funds that the trustee first determines to make, ‘pursuant to the exercise of the trustee’s discretion.’  To interpret the statute as Richard would have us do would render the clause concerning the trustee’s discretion mere surplusage.”

The court went on to say that though a trustee’s discretion is not limitless, and upon a showing of abuse of such discretion the court could order that the trustee do things differently, there had not been such a showing in the present case.  This was a discretionary support trust in which Trustee McCoy had been given broad discretion “to provide for Steven’s needs to the extent that all other sources available for such purposes were not doing so.” (internal quotations omitted).  In exercising that discretion, the court could not find any bad faith or unreasonable conduct.

Special thanks to Julia M. Wei (Law Offices of Peter N. Brewer, Palo Alto, California) for bringing this development to my attention.