We recently represented two different institutional trustees and in each case the primary beneficiary of the trust was incarcerated -- guests of the state, if you will. They were later released. A recent decision out of California on quite another case shows some of the issues trustees face in such situations, including: Can trustees in their discretion deny distributions to imprisoned beneficiaries whose needs are being taken care of by the state? It also raises the interesting public policy question of whether prisoners should be living on the taxpayers' largesse when they have money to foot the bill for their upkeep.

In Young v. McCoy, 54 Cal.Rptr.3d 847 (Cal. Ct. App. 2007), Lucile Young had two children, Richard and Steven Young. Steven lived with his mother in her Woodland Hills home. One morning in July of 1997, Richard visited Lucile in her home in Woodland Hills, Calif. An argument broke out, and Steven shot Richard. Though injured, Richard survived. Steven was convicted of premeditated attempted murder and, in January of 1998, sentenced to life in prison plus 13 years. Later that year, Richard filed a personal injury action against Steven.

In December of 1998, Lucile decided to amend her testamentary trust. She made Kathy Jayne McCoy her successor trustee and ordered that Kathy hold the entire trust for the benefit of Steven throughout his life. Upon Steven's death, any remaining trust assets were to be distributed to the Christian Science Foundation of Boston. Though Lucile intended that Steven be provided for, she gave Kathy discretion in distributing the trust assets. In particular, Lucile specified that Kathy should pay to Steven as much of the income or principal of the trust estate as Kathy deemed necessary for his health, support, maintenance and education, taking into consideration all other sources available for such purposes. The trust also contained a standard spendthrift clause prohibiting a creditor's attachment or a beneficiary's alienation of trust assets.

Although Richard was the victim of the shooting, Lucile made comments suggesting that she deliberately failed to specify him as a beneficiary. She noted that Richard was her son. However, she also specified that Kathy was not to allow Richard into Lucile's home after her death and granted Richard $5,000 after her death only if he released her, Steven, and the trust from all known and unknown claims. In 1999, Lucile again amended her trust. The newly amended version was generally consistent with the December amendment and reemphasized the intent of the trust: to care for Steven.

Two years later, in August 2001, Richard won a default judgment in the 1998 personal injury action for $1.275 million. Nearly four years later, in March 2005, Lucile died, survived by both Steven, who was still in prison, and Richard. Upon Lucile's death, the terms of her testamentary trust became effective, and Kathy, the trustee, was authorized to make distributions to Steven for his support if she deemed it necessary. Kathy did not deem it necessary. She made no payments to Steven because, in her view, Steven's needs were being taken care of by the state of California while he was incarcerated.

In May of 2005, Richard filed a petition pursuant to Section 15305.5, subdivision (c) of the California Probate Code (providing that, regardless of a beneficiary's right to compel a trust distribution, a court may order a trustee to satisfy all or part of a restitution judgment out of all or part of future payments that the trustee, in his discretion, determines to make to, or for, the beneficiary's benefit.) Richard's petition sought to enforce his restitution judgment against Steven from trust assets. Although Steven made no appearance in the trial court, Kathy, as trustee responded and petitioned for instructions, and the First Church of Christ (the charitable remainder beneficiary) objected to Richard's petition. The lower court denied Richard's petition, asserting that the court had no authority to order Kathy to distribute any funds to Richard when she had reasonably exercised her discretion under the trust to make no payments to Steven. Richard appealed.

In ruling on Richard's appeal, the California Court of Appeal first considered issues of statutory interpretation, examining the plain meaning of the relevant statute, as well as legislative intent. The court concluded that the statute applies to trust payments that are subject to the trustee's discretion and, in this context, a court may direct payments from a trust to a restitution judgment creditor only after the trustee has decided to make payments to the beneficiary.

The court then considered the issue of trustee discretion. Although the relevant statute did not give the court authority to invade the assets of Lucile's trust, the court noted that a trustee's discretion is not unlimited. If a trustee abuses her discretion, a court may intervene. However, the evidence showed no abuse of trustee discretion but rather that Kathy had exercised her discretion in conformity with Lucile's intent. In providing for discretionary distributions to Steven for his support, Lucile's trust specified that the trustee should exercise her discretion in consideration of all other financial sources available for Steven's support. Kathy appropriately considered the fact that Steven was being supported by the state of California. The court concluded that there was no evidence of bad faith or unreasonable conduct in Kathy's decision to refrain from making distributions to Steven. Thus, there was no need for the court to intervene on this basis either. Therefore, the California Court of Appeal affirmed the trial court's order, denying Richard's petition to invade the assets of Lucile's discretionary trust.

The Young v. McCoy case is concluded -- but the public policy question it raises is far from ansewred. Query: Why should the California taxpayers pay for Steven's upkeep when he's perfectly capable of doing that for himself? According to the California Legislative Analyst's Office, each inmate in the California Department of Corrections will have cost state taxpayers $42,000 from July 1, 2006, to June 30, 2007.

Had Richard been incarcerated in Connecticut, the state itself would have been a creditor with an eye on the trust assets, as provided under Connecticut General Statutes Section 18-85b. Query whether the state's claim would take precedence over Richard's. Under a relatively new state law, a prisoner in the Connecticut penal system with enough money to pay the bill for his stay is being required to do just that. Improved computer technology is allowing that state to track inmate inheritances, insurance settlements and awards from lawsuits. "The state requires that, if an inmate is able, that they reimburse the taxpayers for the cost of their incarceration," notes Stacy Smith, a spokeswoman for the Connecticut Department of Correction. Since passing the law in 2004, Connecticut has recovered about $5 million -- and the amount is going up each year. The Department of Social Services, also covered by the law, has collected nearly $40 million from welfare recipients who received what the state calls "windfalls."

Professional trustees reading about this new trend are likely thinking, "What about the spendthrift clause in many trusts?" Such clauses usually protect trust assets from both the beneficiary's improvidence (voluntary alienation) and the reach of the beneficiary's creditors. Keep in mind, though, that spendthrift concepts are state law creations. And what the state gives, it can surely take away.