A prospective client had established several years ago an irrevocable trust. The trust provided that all income be paid to the client, settlor, during his lifetime, and that upon his death the balance of trust property went to other named beneficiaries. The trust agreement had a spendthrift provision which says the settlor’s income interest could not be assigned or attacked by his creditors. The prospective client thought that his interest was protected because the trust was irrevocable and because of the spendthrift agreement. I advised him that this trust would not protect him from creditors and that it would not survive a bankruptcy.
This trust is a “self settled trust” because the settlor established the trust for his own benefit during his lifetime. Florida courts have held that spendthrift protection set forth in self-settled trusts is invalid against creditors. The courts have found that public policy prohibits debtors from putting money in a trust and retaining a beneficial interest in the money.
That the trust is irrevocable, or that the ultimate beneficiaries are people other than the settlor, does not solve the problem. A creditor or bankruptcy trustee could take the settlor’s lifetime income interest. The income interest could be sold for its present value based on the settlor’s age and the amount of monthly income.
One solution would be for the trustee of the trust to invest all the trust property in an annuity which pays current income. The trust distributions would represent proceeds of an annuity which proceeds are exempt from creditors under Florida statutes.
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