Due and Payable.

They should think about it again. Because the protection a spendthrift clause offers is not a wall around the trust. It is a wall around the timing of the trust. And the moment a distribution becomes due, the wall has a door in it.

That is the lesson of a pair of decisions — one from the Supreme Court of California, one from the Ninth Circuit — that together map, with unusual precision, exactly where a third-party spendthrift trust stops protecting a beneficiary in bankruptcy. The cases are not new; the California Supreme Court answered the question in March 2017 in Carmack v. Reynolds, 391 P.3d 625, 215 Cal. Rptr. 3d 749 (Cal. 2017) (No. S224985, filed 23 March 2017) (Liu, J.), and the Ninth Circuit applied that answer in August 2017 in Frealy v. Reynolds (In re Reynolds), 867 F.3d 1119 (9th Cir. 2017) (per curiam). But they remain the clearest available statement of the rule, and the planning point they make has not aged a day. If anything, it has become more relevant as more families push wealth down a generation through trusts whose beneficiaries have their own creditors, their own businesses, and their own risk.

Rick Reynolds’s parents established the Reynolds Family Trust in 2005. It contained a conventional spendthrift clause, providing that “no interest in the income or principal of any trust created under this instrument shall be voluntarily or involuntarily anticipated, assigned, encumbered, or subjected to creditor’s claim or legal process before actual receipt by the beneficiary.” Carmack, 391 P.3d at 626.

His mother died in 2007. His father received all the trust’s distributions until his own death in 2009. On the father’s death, the instrument entitled Reynolds to $250,000 if he survived his father by thirty days, then $100,000 a year for ten years, and then a one-third share of the remainder. Every one of those payments was to come out of principal — the trust’s assets were undeveloped real estate that produced no income at all. Id. at 626.

The day after his father died, Reynolds filed a voluntary chapter 7 petition. Id. at 626–27.

Pause there, because the timing is the whole case. This was not a settlor trying to hide from his own creditors. This was a third-party trust, established by parents, years before anyone’s insolvency, funded with the parents’ own property — the textbook legitimate structure. Reynolds did nothing improper by filing. But his bankruptcy trustee then went looking for what the estate could reach, and the trust’s remaining principal was the obvious target.

The bankruptcy court granted the debtor summary judgment. The Bankruptcy Appellate Panel affirmed, holding the trustee capped at 25 percent. In re Reynolds, 479 B.R. 67 (B.A.P. 9th Cir. 2012) (Hollowell, J.), affirming the ruling of the U.S. Bankruptcy Court for the Central District of California (Jury, J.). On further appeal the Ninth Circuit found the California Probate Code’s provisions, in its own word, “opaque,” and did the honest thing: it certified the question to the California Supreme Court. Frealy v. Reynolds, 779 F.3d 1028, 1030, 1033 (9th Cir. 2015).

The difficulty was a genuine one. The Probate Code says spendthrift provisions are generally valid as to both income and principal. Cal. Prob. Code §§ 15300 (trust income), 15301(a) (trust principal). But it then carves out several categories of creditor who may nevertheless reach in — claimants for spousal and child support, restitution judgments, certain public entities. Cal. Prob. Code §§ 15305, 15305.5, 15306. And for general creditors it offers three separate provisions that do not obviously fit together: section 15301(b), section 15306.5, and section 15307. Section 15306.5 caps a general creditor at 25 percent of anticipated payments. Section 15307 appears, on its face, to let a creditor reach everything beyond what the beneficiary needs for education and support. Section 15301(b) does something different again. Which governs?

The California Supreme Court held that a general creditor — including a bankruptcy trustee standing as a hypothetical judgment creditor — can reach a beneficiary’s interest in a principal-paying spendthrift trust in two distinct ways:

The Ninth Circuit then applied that answer, reversed the Bankruptcy Appellate Panel, and remanded so that the bankruptcy court could apply the teachings of Carmack. In re Reynolds, 867 F.3d 1119 (9th Cir. 2017).

Note what the court did with section 15307’s apparent breadth. Rather than read it as an unlimited creditor remedy that would swallow the 25 percent cap, the court traced the 1986 Law Revision Commission revisions and concluded that the enactment of section 15307 “without apparent limitations on the reach of general creditors was inadvertent” — a drafting error. “The Legislature plainly intended general creditors to be limited to 25 percent of distributions from the trust.” Carmack, 391 P.3d at 631. That is a court working hard to preserve spendthrift protection, not to dismantle it.

The first channel is the one that surprises people, and it is worth stating in plain terms.

Once an amount of principal “has become due and payable to the beneficiary under the trust instrument,” the spendthrift protection is simply gone as to that amount — even though the money is still sitting in the trustee’s hands and has not been paid out. Cal. Prob. Code § 15301(b); Carmack, 391 P.3d at 628. The court’s reasoning is clean: “Because the beneficiary’s interest in those assets has effectively vested, the law no longer has any interest in protecting them.” Id. at 628–29.

So section 15301(b) is not really an exception to spendthrift protection. It is, as the court put it, a corollary of it — “properly viewed not as an exception to the general spendthrift protections but as a corollary.” Id. at 628. The general rule is that principal is untouchable until it is paid to the beneficiary. Section 15301(b) adds that once an amount has become due and payable, the creditor need not wait for the physical transfer — the court can order the trustee to pay that amount to the creditor instead. The clause protects the beneficiary from his creditors while the trustee still holds discretion. It does not protect a payment the beneficiary has already earned the right to receive.

The court’s own illustration makes the arithmetic concrete. Suppose a trust distributes $10,000 of principal on March 1 each year for ten years, and a general creditor holds a $50,000 money judgment, with no support purpose specified. On March 1 of the first year the creditor can capture the entire $10,000 due that year, plus $2,500 from each of the nine anticipated payments — $22,500 — as they are paid. If $17,500 of the judgment still stands after that, the court may in later years order up to the remainder of each year’s distribution paid over until the judgment is satisfied. Id. at 632.

That is not a modest incursion. That is most of a ten-year distribution stream.

There is a real protection inside the first channel, and it is one that turns on words the settlor chose years earlier.

The full-amount rule does not apply where the trust instrument specifies that the distribution is for the beneficiary’s support or education and the beneficiary actually needs it for that purpose. Cal. Prob. Code § 15302; Carmack, 391 P.3d at 629. Both halves matter. A trust that simply distributes principal on a schedule gets nothing from this provision. A trust whose instrument states the distributive purpose — and whose beneficiary genuinely needs the money for it — keeps the protection.

This is as direct an argument for careful drafting as our field offers. The difference between a distribution a creditor takes in full and a distribution a creditor cannot touch may be a single clause written by a settlor who had no idea which of his grandchildren would one day be sued. It costs nothing to state the standard. It is very expensive to have omitted it.

The 25 percent channel carries its own reduction for the support needs of the beneficiary and dependents — Cal. Prob. Code § 15306.5; Carmack, 391 P.3d at 632 — but note that this is a fact-bound, discretionary reduction argued after the fact, not a rule the settlor controls in advance. The drafted purpose is the better protection because it is fixed before anyone is in trouble.

It would be easy to file these decisions under “spendthrift trusts are weaker than advertised.” That reading misses the more important half.

Nothing in either opinion questioned the validity of this trust. Nobody argued it was a sham. Nobody argued the transfer into it was voidable. Nobody suggested Reynolds controlled it. The entire litigation was a technical dispute about which subsections of a statute govern how much a creditor may take from a concededly valid, concededly protective structure. The trust did what it was built to do: it forced a creditor into a statutory framework with caps, carve-outs and timing rules, rather than handing over a pot of money.

And the reason it got that treatment is the reason we return to in nearly every one of these notes. The trust was third-party settled — established by the parents, funded with the parents’ property. The California Probate Code makes the contrast explicit: spendthrift provisions “are invalid when grantors name themselves beneficiaries.” Cal. Prob. Code § 15304; Carmack, 391 P.3d at 627. Had Reynolds settled this trust for his own benefit, the analysis would not have reached the interesting questions at all. There would have been nothing to cap.

It was also seasoned — created in 2005, funded long before the beneficiary’s 2009 insolvency, with no relationship whatever between the funding and the claims. And it was independently administered: the trustees were third parties who litigated the trust’s position against the bankruptcy estate. Those three features are what bought the beneficiary a statute to argue about instead of a fraudulent-transfer finding.

That the Bankruptcy Code itself honors this bargain is not accidental. Section 541(c)(2) excludes from the estate a beneficial interest subject to a restriction on transfer enforceable under applicable nonbankruptcy law — which is precisely why spendthrift clauses do real work in bankruptcy, and why the argument in Reynolds was about the edges rather than the center. 11 U.S.C. § 541(c)(2); see Carmack, 391 P.3d at 628, citing Restatement (Third) of Trusts § 58 cmt. a.

Four practical points follow, and they are drafting points more than they are litigation points.

First, mandatory distribution schedules are a liability. Every fixed date on which principal becomes “due and payable” is a date on which the wall has a door. A fully discretionary distribution standard, administered by a trustee who is genuinely free to say no, never creates that moment. Where a settlor wants a child to receive money at thirty-five, a discretionary structure with an expressed expectation achieves nearly the same family purpose with a materially different creditor profile.

Second, say what the money is for. The support-and-education carve-out is available only to instruments that claim it.

Third, the beneficiary’s exposure is a design input, not an afterthought. Parents settling trusts for children think about spending habits and divorce. They think less often about the child who will start a business, sign a personal guarantee, or practise a profession. The spendthrift clause is drafted decades before the risk arrives, which means it must be drafted for a risk profile nobody can yet see.

Fourth, situs and governing law are doing quiet work. All of the above is California law. Section 541(c)(2) points to “applicable nonbankruptcy law,” and other jurisdictions draw these lines differently — some considerably more protectively. Which law applies to a beneficiary’s interest is a question worth settling deliberately at the drafting table rather than discovering in a bankruptcy court.

Carmack and Reynolds are not a defeat for asset protection. They are a description of it. A properly settled third-party spendthrift trust, funded on a clear day by someone other than the beneficiary and run by someone other than the beneficiary, is not a magic box — but it converts a creditor’s open-ended claim into a constrained, capped, statutory proceeding over timing. That is what protection actually looks like when it works.

What the cases also show is how much of the outcome was fixed years before the bankruptcy, by choices that cost the settlor nothing at the time: whether to distribute on a schedule or in the trustee’s discretion, whether to state a support purpose, whose law would govern. None of those choices could be revisited once the petition was filed.

The wall is only ever as good as the day it was built.

This note is general commentary on published decisions and is not legal advice for any particular person or structure. How these principles apply turns entirely on the facts, the trust instrument, and the governing jurisdiction. Anyone weighing them against an actual trust should take advice on that trust.