New Legislation in California
Assembly Bill No. 1866: An Act to Amend Section 15304 of the ProbateThe legal proceeding by which a decedent’s testamentary document, such as a will, is proven to be valid, and the subsequent procedure of administering the decedent’s estate. Code, Relating to Trusts

Executive Summary: Effective January 1, 2023, California Probate Code Section 15304(c), if an otherwise valid assetA tangible or intangible item which is owned and has value. protection trustAn arrangement in which property interests are legally held by one person (the trustee) at the request of another (the settlor) for the benefit of a third party (the beneficiary). allows for the settlorThe individual who creates a trust. to be reimbursed for the taxes paid on behalf of the trust, this is not sufficient to allow the settlor’s personal creditors to gain access the trust’s assets.

When a person creates a trust, transfers some of their assets into the trust, but remains a named beneficiaryA person for whom property is held, e.g., in a trust, or who is to receive something as a result of a legal instrument, e.g., a will or insurance policy. of the trust (deriving the benefit of the trust’s assets), this is considered a self-settled trust. California law (Probate Code § 15304) requires that the assets of a self-settled trust must still be accessible to the person’s creditors, regardless of whether the assets are formally in the trust. California does not permit self-settled trusts to be a means of asset protection.

Many trusts are structured in such a way that the assets are removed from the settlor’s taxable estateThe assets and liabilities left behind by a decedent., but those same assets (and any income derived from them) are deemed to be owned by the settlor for income tax purposes. This allows the trust to operate without any tax liability, while the settlor reduces the size of their personal estate that could be subject to “death taxes”. At the same time, many of these trusts give the trusteeA person who stands in a fiduciary relation to another, having been given legal title to someone else’s property for the benefit of a third party. discretionary power to reimburse the settlor for the taxes paid.

Given that California law specifically requires the assets of a self-settled trust to be accessible to the settlor’s creditors, the specific issue arises as to whether a trust granting discretionary power to reimburse the settlor for the taxes paid is sufficient, on its own, to make the trust a “self-settled” trust. If so, then, this one provision would defeat an otherwise valid asset protection trust.

Assembly Bill No. 1866 revises California law to specify that a trustee’s discretionary power to reimburse the settlor for the taxes paid does not make the trust a self-settled trust. In other words, if an otherwise valid asset protection trust allows for the settlor to be reimbursed for the taxes paid on behalf of the trust, this is not sufficient to allow the settlor’s personal creditors to gain access the trust’s assets.

David J. Hallstrom, Esq. and his trust and probate litigation team are here to help with any of your trust or probate concerns. We bring a broad base of experience and a global perspective to help you achieve effective, practical, and timely results.

Call David J. Hallstrom at (888) 308-1261 to schedule your consultation.