I received an email from a Florida attorney concerning asset protection of a trust established for the benefit of a Florida debtor where the trust agreement names the same debtor/beneficiary as trustee and also includes standard spendthrift protection. Such trust arrangements are often set up by parents’ living trusts for the benefit of their children as part of the parents’ estate planning. Otherwise stated, the question is whether trust beneficiary enjoys protection from standard “spendthrift provisions” where the beneficiary serves as trustee with discretion to make distributions to himself.
I think that the trust beneficiary cannot rely on creditor protection where the trustee also has discretion to make distributions. My reasoning is that even though the trust document states that distributions are discretionary a judge could order the trustee/debtor to distribute trust assets where they could be subject of creditor seizure. Alternatively, the creditor could argue the trustee’s discretionary power is an asset subject to the creditor’s levy. The creditor could take over the power and distribute all trust property to the debtor/beneficiary where the property would be subject to the creditor.
The referred me to a Florida bankruptcy case which he says held that Florida trusts cannot enjoy spendthrift protection if the same debtor is trustee and beneficiary. (In re Bottom, 176 BR 950). If asked , most parents who want to leave assets to children in trust would want the same assets protected from their children’s creditors. One alternative is for the parents to name an independent trustee so that the beneficiary has no powers to effect distributions. I find that many parents want to give their children at least limited control over their trust property and to that end my trust documents require the beneficiary to select their choice of an independent co-trustee over their trust share. I almost always provide that no trustee can make any distribution for the benefit of a beneficiary’s creditors or former spouses
I believe the combination of these provisions provides reasonable asset protection with sufficient input from the beneficiary for estate planning. But, I may be wrong; different lawyers will have different techniques.
The same attorney pointed out in a follow up email that this issue is a good example of how asset protection goals often conflict with estate planning goals. He states correctly that from an estate planning and tax standpoint there is no harm in having a beneficiary serve as sole trustee so long as discretionary distributions are limited for health, education, maintenance, and support.
This is an interesting issue and comments would be most