The Florida legislature enacted an important new trust statute during the 2006 legislative session. The new Florida Trust Code, found primarily in Chapter 736, Florida Statutes, became effective on July 1, 2007. Except as specifically provided, the new trust law applies retroactively to all previously created Florida trusts. The trust law has its greatest impact on estate planning and trust administration. Several provisions in the new law are important for using trusts in Florida asset protection planning.
Spendthrift Provision Provides Asset Protection
Florida courts have consistently held that a beneficiary’s interest in a trust established for his benefit by another person is protected from the beneficiary’s creditors so long as the trust agreement includes a “spendthrift provision.” A spendthrift clause typically states that a beneficiary may not assign or convey his beneficial interest. This type of trust language is called “spendthrift” because it is supposed to prevent an otherwise improvident beneficiary from squandering his inheritance. Florida courts have held that if the trustmaker prohibits the beneficiary from assigning his beneficial interest then the beneficiary’s creditors cannot force the assignment to pay the beneficiary’s debts.
Florida’s new trust law gives statutory recognition to spendthrift provisions. To be effective under the new statute a spendthrift provision must expressly restrain both voluntary and involuntary transfers of a beneficiary’s trust interest. Unless both types of transfers are prohibited in the trust agreement the spendthrift provision will not meet the statutory requirements. After a trustee makes a distribution from a spendthrift trust to a beneficiary, the money in the beneficiary’s hands is no longer protected from the beneficiary’s creditors.
Florida’s new trust code includes two exceptions to spendthrift protection. First, the statute prohibits a trustee from withholding a distribution otherwise due to be paid to a beneficiary solely to protect the distribution from the beneficiary’s creditors. Overdue mandatory distributions can be garnished from a spendthrift trust. The second exception from spendthrift trust protection includes so-called “exception creditors” or “creditors of last resort.” These special creditors include claims by a beneficiary’s child, claims of former spouse for support and maintenance, and claims by creditors (such as an attorney) who have provided services for the protection of a beneficiary’s interest. Another exception is made for claims by a state of the U.S. to the extent provided in a separate law.
Asset Protection Of Discretionary Distribution Provision
The next part of the new Florida trust law with asset protection implications is found in Section 736.0504(1) which protects beneficiaries of discretionary trusts. The new law states that a beneficiary’s creditor cannot compel a trustee to make a discretionary distribution of income or principal to a trust beneficiary when the distribution would become vulnerable to the beneficiary’s creditor claims. This protection against forced distributions applies whether or not the trust has a spendthrift provision, whether or not the trustee’s discretion is subject to a standard, and whether or not the trustee may have abused his discretion. The same protection of the trustee’s discretionary distributions applies to trusts where the beneficiary is also the trustee, provided in that case that the trustee’s discretion to distribute property for his own benefit is limited by an ascertainable standard of discretion. A typical ascertainable standard is the health, support, and maintenance of the beneficiary. As long as the trust agreement’s provisions for discretionary distributions includes an appropriate standard, a debtor who is both a trust beneficiary and the appointed trustee over his own trust share can exercise discretion to withhold distributions in order to protect the trust property from his own creditors. It is not clear whether an “exceptional creditor” or “creditor of last resort” may garnish payments payable to a debtor/beneficiary from a discretionary trust.
Self-Settled Trusts: No Asset Protection
The asset protection provisions of the new Florida trust law apply only to trusts set up by a trustmaker other than the beneficiary. A trust established for one’s own benefit, a so-called self-settled trust, provides no asset protection benefits under the new trust statute. The new trust code states that whether or not a self-settled revocable trust agreement includes a spendthrift provision the trust property is subject to the claims of the settlor’s creditors. This exception is consistent with several Florida court decisions refusing creditor protection from self-settled trusts for reasons of public policy. A common self-settled trust is a revocable living trust used for estate planning. A living trust provides the settlor/trustmaker no asset protection. Even in the case of an irrevocable self-settled trust, a creditor may attack the maximum amount that the trustee may distribute back to the settlor.
An excellent summary of the new trust law is an article written by David Power in the August, 2006 issue of the Florida Bar Journal (available online at http://www.floridabar.org).