NEW ASSET PROTECTION TOOLS - Florida's New Trust Law
The Florida legislature
enacted an important new trust statute during the 2006 legislative
section. The new Florida Trust Code, found primarily in Chapter
737, Florida Statutes, will become effective on July 1, 2007.
Except as specifically provided, the new trust law applies retroactively
to all Florida trusts previously created. 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.
To begin with, 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 once 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.
The next part of the new Florida trust law with asset protection
implications is new 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 his discretion to withhold distributions
in order to protect the trust property from his own creditors.
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).
