What is an Asset Protection Trust?
A Florida asset protection trust is a self-settled trust that some debtors believe protects their assets from judgment creditors. A self-settled trust is a trust where the person (trustmaker) who creates the trust and transfers the assets to the trust is also a trust beneficiary. A revocable living trust (used for estate planning) is a typical example of a self-settled trust.
However, under Florida law, a self-settled trust does not provide asset protection. A judgment creditor can levy upon a debtor’s interest in a trust that the debtor created for his own benefit.
Domestic Asset Protection Trust
Some states in the U.S. have recently enacted statutes that expressly provide asset protection benefits to self-settled trusts. Trusts created under these state statutes are referred to as domestic asset protection trusts (“DAPT”). These DAPT’s were designed to attract businesses and assets to their states by offering creditor protection.
Most state domestic asset protection trust statutes have several common features. The domestic asset protection trusts are irrevocable so that the trustmaker may not change his mind and change the beneficiaries or terms of the trust agreement. Most states’ DAPT statutes require at least one trustee to be either a state resident or a corporation doing business in that state and that some trust assets must be located or deposited in the state. The DAPT statutes typically provide for a position of “trust protector,” who is a person with the power to veto the trustee’s decisions to make distributions if such distributions may be vulnerable to the trustmaker’s creditors.
Alaska, Delaware, Utah, and Nevada are states with favorable domestic asset protection trust laws. Florida does not have a statute enabling self-settled domestic asset protection trusts. Florida law has consistently followed a public policy against self-settled trust providing asset protection for the trustmaker.
A DAPT works well in theory, and many legal experts make reasonable arguments supporting the DAPT’s asset protection. The legal issue in DAPT planning is a “conflict of law” issue. Suppose a Florida resident forms a self-settled trust in a DAPT state such as Delaware, Alaska, Utah, etc. In that case, the legal issue is whether Florida courts will apply the protective laws of the DAPT state, which has encouraged self-settled trust protections, or the Florida law opposing self-settled trust protection? Resolving the conflict between Florida’s public policy against self-settled trusts and contrary policy in DAPT states is legally complicated.
In general, if a Florida debtor establishes a DAPT trust, the more that trust assets, records, and parties are situated in the DAPT state, the more likely the DAPT state laws will apply, and the trust will be protected from the Florida debtor’s creditors. However, the more the DAPT trust assets and parties are in Florida, the more likely Florida courts will apply Florida law, and trust assets will not be protected from creditors. To date, no Florida court has held that a debtor’s interest in a DAPT formed under the laws of another state is protected from a Florida judgment.
It is possible to structure an estate planning trust in Florida to achieve asset protection. Although assets in the debtor’s living trust, a form of a self-settled trust, are not protected from the debtor’s creditors, a Florida resident may protect assets in a trust created by another person.
There is authority that a debtor’s interest in a trust which the debtor forms or funds with his own non-exempt money will be protected from creditors if anyone other than the debtor is given control over trust assets. Therefore, a properly drafted Florida trust may provide the trustmaker effective asset protection even though Florida has not enacted specific asset protection trust statutes.
Do Florida Living Trusts Provide Asset Protection?
Living trusts are a common estate planning tool. The purpose of a living trust is to avoid guardianship while the trustmaker is alive and to avoid probate after the trustmaker dies. Some people believe that their living trust also provides asset protection. A living trust is a self-settled trust because the trustmaker is the beneficiary of the trust during the trustmaker’s lifetime. Therefore, a Florida living trust provides no asset protection for the trustmaker.
Important Court Cases
In re Brown, 303 F. 3d 1261 (11th Cir. 2002): Self-Settled Spendthrift Trusts Do Not Provide Asset Protection
Florida law prohibits a judgment creditor from reaching a beneficiary’s interest in a trust with properly drafted spendthrift provisions. However, when the debtor establishes a trust for his owner benefit so that the debtor is both the settlor or trustmaker and beneficiary, the trust is characterized as a self-settled trust. Spendthrift provisions do not protect the trustmaker’s own beneficial interest from creditors in a self-settled trust. The court says Florida public policy strongly disfavors self-settled trusts.
Miller v. Kessler, 34 So. 3d. 172 (3rd DCA Fla. 2010): Discretionary Trust Protects Beneficiary’s Interest From Creditors
When a trust document provides the trustee complete discretion over distributions to beneficiaries, a beneficiary’s creditor may only reach those distributions that the trustee actually makes to the beneficiary. The court cited section 736.0504(2) of Florida law. The beneficiary’s creditor may not compel a distribution from the trustee or attach any interest in the trust before the trustee makes the distribution.
Last updated on November 18, 2021