Could California collect a vessel-use-tax debt from a beneficiary's spendthrift trust?

Plain-English summary

California legal staff found no apparent defect invalidating a spendthrift trust that benefited a taxpayer owing about $17,500 of vessel use tax.

The trust corpus generally was protected from the beneficiary's creditors. Even invalidating the document might not help California because the property would return to the trustor rather than the beneficiary.

However, former Civil Code section 859 allowed creditors to reach trust rents and profits exceeding what was necessary for the beneficiary's education and support. Because tax-return and litigation evidence suggested possible other income and assets, staff recommended gathering facts, referring a debtor examination, and separately levying any rent from property personally owned by the taxpayer.

Common questions

Did staff find the trust invalid?

No.

Could California reach any trust income?

Potentially the surplus beyond necessary support.

What further action was recommended?

A factual investigation and debtor examination, plus a levy on separate rental income if the taxpayer still owned the rental property.

Citations and references

• Former California Civil Code section 859 — surplus trust rents and profits discussed
• California Code of Civil Procedure section 708.110 — debtor examination recommended
• Estate of Delano, 62 Cal.App.2d 808 (name and reporter as printed) — spendthrift trust purpose cited; the reporter page resolves to Pacific Guano Co. v. Weller
• Vooge v. Reinicke, 45 Cal.App.2d 290 (name and reporter as printed) — invalid-trust property return discussed; the reporter page resolves to Consolidated Shippers, Inc. v. Pacific Employers Insurance
• Estate of Lawrence, 267 Cal.App.2d 77 (name and reporter as printed) — creditor reach into surplus trust income cited; the reporter page resolves to United California Bank v. Lawrence

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/170-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/170-0140.pdf

Original ruling text

State of California

Board of Equalization

170.0140

Memorandum
To:

Mr. P. K. Taylor (RAS)

From:

Legal (RLD)

Subject:

REDACTED TEXT

Date:

May 31, 1985

This is in reply to your March 29, 1985 memorandum regarding the validity of the REDACTED TEXT Trust. You explained that Mr. REDACTED TEXT is indebted to the board for approximately
$17,500 use tax on his purchase of two vessels. The only asset which the compliance staff has located in which Mr. REDACTED TEXT has an interest is a trust of which Mr. REDACTED TEXT is the beneficiary, subject to a spendthrift provision. You asked whether the trust itself is valid and, if not, whether the board can look to the assets in the trust or merely the income of the trust for payment of Mr. REDACTED TEXT ’s use tax liability. A spendthrift trust is a trust which provides that the interest of the beneficiary can neither be transferred by the beneficiary nor reached by the beneficiary's creditors. Such trusts are created by the trustor for the purpose of providing a fund for the maintenance of another, and at the same time, securing it against his or her own improvidence or incapacity. (Estate of Delano 62 Cal.App.2d 808.) Spendthrift trusts are generally valid, and after reviewing the REDACTED TEXT Trust, I do not see anything that would cause the trust document to be invalid. The trust was created by, Mr. REDACTED TEXT as trustor, whereby he placed real property in trust for the benefit of his son, Mr. REDACTED TEXT. If the trust document were invalid, we believe that the board would not benefit, because the property would merely go back to Mr. REDACTED TEXT. (Vooge v. Reinicke 45 Cal.App.2d 290.) However, REDACTED TEXT filed a petition in the Los Angeles Superior Court, Case No. REDACTED TEXT, attempting to apply rents and profits of the trust in satisfaction of a judgment against Mr. REDACTED TEXXT. REDACTED TEXT apparently relied on facts it had learned of to assert that the spendthrift provision of the trust had been waived either by the trustor, the trustee or the beneficiary. REDACTED TEXT further asserted that the trust was not a valid spendthrift trust. In opposition to REDACTED TEXT’s petition in the litigation, Mr. REDACTED TEXT certified that he is totally dependent upon the income that he receives from the trust and that such income was less than $12,000 for the calendar year 1983. (see paragraph 10, page 4.). However, the Occasional Sales Use Tax Unit's files contain a copy of Mr. REDACTED TEXT’s State income tax return for the calendar year of 1983. On such return, Mr. REDACTED TEXT

Mr. P. K. Taylor

-2-

May 31, 1985
170.0140

reports $ 4,700 gross rental income from property in Point Arena and deductions for sales tax of
$518 paid on the purchase of a mobile home and $1,860 paid on the purchase of a vessel. Since Mr. REDACTED TEXT claimed an interest deduction of only $240 on a loan, it appears possible that he traded property or paid cash for the boat and mobile home in 1983 and perhaps has another source of income besides the trust. A creditor may reach the surplus of rents and profits of a spendthrift trust beyond the sum that is necessary for the education and support of the beneficiary (Section 859, Civil Code; Estate of Lawrence 267 Cal.App.2d 77.) The question of whether such surplus may be reached may be tried in statutory proceedings supplemental to execution such as the examination of a debtor. We suggest that the staff gather whatever facts are available that would aid in an examination of Mr. REDACTED TEXT pursuant to Section 708.110, Code of Civil Procedure, and refer the case to the Attorney General's office for such examination. If Mr. REDACTED TEXT still owns the rental property at Point Arena, we suggest that a Notice of Levy be served on the tenant for any rental payments which the tenant pays to Mr. REDACTED TEXT. If you have further questions on this, feel free to contact me.

RLD:ct