Many people unfamiliar with trusts are under the impression that all trusts protect an individual’s assets from the reach of his or her creditors. This is not so. For example, a revocable trust provides absolutely no protection from a settlor’s creditors. Creditors can reach the full value of the property held within the trust to satisfy their judgments against the settlor of the trust.
This is not to say that trust can’t be drafted to afford any creditor protection. Significantly, Florida law provides a settlor of a trust methods to ensure that creditors of a beneficiary will be unable to garnish or attach a beneficiary’s interest in a trust to satisfy a judgment before the beneficiary has received the distributions. When a person wants to ensure that property he gives to beneficiaries is safe from creditors, there are certain provisions he can include within the trust to protect the intended recipients.
The first method entails the use of a spendthrift provision, in which a beneficiary of a trust is restricted from voluntarily or involuntarily alienating an interest in a trust which includes claims of creditors. Florida statute 736.051 provides that terms of a trust providing that the interest of a beneficiary is held subject to a spendthrift trust, or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary’s interest. Therefore, when provisions are placed into a trust which include spendthrift provisions, a creditor of a beneficiary cannot reach the beneficiary’s interest in the trust unless and until the trustee actually distributes funds to the beneficiary. A spendthrift provision should usually be included in all trust documents even if the settlor is unaware of any creditor problems currently confronting a beneficiary.
Another method used to protect a trust’s assets from the reach of creditors, is the inclusion of discretionary authority given to the trustee to make distributions. A discretionary trust where a trustee has the authority, but is not required, to make distributions also protects a beneficiary’s interest in a trust from his or her creditors. Florida Statute 736.0504 provides that a creditor of a beneficiary can’t compel a distribution which is in the trustee’s discretion, nor attach or otherwise reach the interest of a beneficiary resulting from a trustee’s power to distribute funds to the beneficiary.
To further matters of public policy relating to children and former spouses, exceptions to the creditors protections afforded to spendthrift provisions have been introduced into the law. The Supreme Court has held that an exception to the spendthrift rules applies when a beneficiary has obligations to pay alimony and/or child support. The Court’s holding was subsequently codified in Florida Statute 736.0503, which provides that a spendthrift provisions is not enforceable against “ A beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance.” Nevertheless, the statute includes language which provides that attachment of an interest in a spendthrift trust is only available as a last resort upon a showing that traditional methods to enforce the claims are unavailable.
Whether one of these exception creditors can garnish or attach an interest in a discretionary trust remains uncertain after the second dca’s ruling in Berlinger V. Casselberry, where the court allowed a former spouse to garnish the interests of her former spouse in discretionary trusts in which he was receiving substantial payments.
If you have any questions regarding trusts, or any other matters concerning setting up your estate, contact our Fort Lauderdale or Boynton Beach office today.