Self-Settled Trust May Be Protected From Creditors According To Court Decision

A recent  Federal District Court opinion, if not appealed, suggests a significant asset protection planning opportunities through uses of Florida inter-vivos (“living”) trusts. To review, a judgment creditor may not attack a debtor’s beneficial interest in a trust where the trust has spendthrift provision.

Spendthrift protection does not apply where the debtor established or funded the trust with his own assets for his own benefit (so-called “self settled trusts”). Self-settled trust does protect creditors in other states which have enacted statutory protections with domestic asset protection trust legislation, but Florida courts will apply Florida law to the debtor’s beneficial interest in trusts formed elsewhere.

The Florida District Court held that where a debtor sets up a trust, or contributes his own money to a trust, for the debtor’s benefit, the trust is not “self-settled” because the debtor is not the “settlor” to the extent another person has the power to revoke or withdraw the settlor’s  assets from the trust. The court cited the definition of settlor from Florida statutes and the Uniform Trust Code. The Court referenced comments made by the statute’s drafters which explained that a family member donating assets to a trust revocable by another family member should not be considered to be a settlor of the trust.

This decision, if not appealed and if followed by other judges, opens up significant asset planning options in Florida. A debtor could protect non-exempt assets in by conveying his own non-exempt assets to a trust for his own benefit, and by giving another person ( even a family member) the right to control trust assets. Such trust still are subject to challenge under fraudulent transfer statutes. In re Quaid, Case No 11-cv-028.

 

Last updated on May 22, 2020

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