In re Brown Case Analysis

In Menotte v. Brown (In re Brown), 303 F.3d 1261 (11th Cir. 2002), the Eleventh Circuit held that a self-settled trust’s spendthrift clause is ineffective under Florida law against the settlor’s own creditors. Jane McLean Brown had put a $250,000 inheritance into a charitable remainder unitrust entitling her to 7% of its value each year for life, and the court let her bankruptcy trustee, Deborah Menotte, reach that income interest.

The creditors’ reach stopped at the interest Brown kept for herself. The trust corpus had passed irrevocably to charitable remaindermen, so it stayed beyond the reach of her creditors; a completed gift to others is no longer the settlor’s property, spendthrift clause or not.

How Brown Set Up Her Charitable Remainder Trust

Jane McLean Brown inherited about $250,000 when her mother died in 1993. She suffered from chronic alcoholism and wanted the money protected against her own improvidence, so she placed it in an irrevocable trust on August 11, 1993. The agreement created a charitable remainder unitrust—an irrevocable trust under which the settlor keeps a yearly payout tied to the trust’s value and the remainder goes to charity. The agreement entitled Brown to an annual payment equal to 7% of the trust’s net worth, due in monthly installments. She was unemployed and lived off the payments.

Brown also served as trustee, but her powers were generally limited to directing investments. She had no discretion to invade the trust corpus and no power to change the payment amounts. A spendthrift clause in the agreement barred any beneficiary from assigning an interest and put all sums payable beyond legal or equitable process. At her death the 7% income would go to her daughter for life; the corpus would then pass to four named charities. Brown could substitute other charitable remaindermen, but only charities meeting Internal Revenue Code qualifications.

Brown filed chapter 7 on February 4, 1999, listing claims totaling $110,023.53, and claimed her trust interest as exempt from the bankruptcy estate. Deborah Menotte, the chapter 7 trustee, objected on the ground that a self-funded trust is not insulated from creditors. The bankruptcy court overruled the objection in July 2000, holding the spendthrift clause effective and adding that the trust also qualified as a support trust. The district court affirmed on the spendthrift ground alone.

Why the Spendthrift Clause Failed

Florida law enforces spendthrift clauses, but the protection has a built-in limit. Florida’s definition of a spendthrift trust requires that it provide “for the maintenance of another,” securing the fund against the beneficiary’s own improvidence. A trust a settlor creates for her own benefit sits outside that definition, so Florida law does not protect its assets from the settlor’s creditors.

The Eleventh Circuit traced the rule through earlier decisions applying Florida law, which denied protection to a Keogh plan funded by its own beneficiary, a self-funded deferred compensation plan, and a self-settled interest in an employer’s thrift plan. The court also grounded the rule in the common law of trusts. The Restatement (Second) of Trusts states that a person who creates a trust for his own benefit, restraining transfer of his interest, leaves that interest reachable by his creditors.

Two facts sharpened the holding. Brown was apparently solvent when she created the trust, and no one claimed she meant to defraud anyone. The court held both facts immaterial: public policy will not let a person tie up her own property so that she can still enjoy it while her creditors cannot reach it.

Brown’s lack of control did not save the clause either, because self-settlement and control are independent grounds for invalidating a spendthrift provision, and self-settlement alone was enough. Cases such as In re Lawrence, which mix the two grounds, involved trusts that were both self-settled and controlled by the settlor.

What Brown’s Creditors Could Reach

When a settlor creates a trust for her own benefit and adds a spendthrift clause, the entire clause is void as to her creditors. Without a valid restraint, a beneficiary’s trust interest is a property right, liable for the beneficiary’s debts to the same extent as her legal interests. A right to receive income for life can be assigned or attached like any other property right.

Creditors of a settlor-beneficiary reach only what the settlor kept. Brown retained a right to 7% of the trust’s value each year for life and nothing else, so that income interest passed to her bankruptcy trustee. The corpus stood on different footing: Brown had given it away irrevocably, the charities held a vested remainder, and a completed gift stands no more exposed to the settlor’s creditors than property deeded to the recipient outright.

The court noted two exceptions, neither present in Brown’s trust. Creditors can also reach the corpus where the trustee has discretion to invade it for the settlor’s benefit, or where the settlor keeps a general power to appoint the remainder. Brown’s trustee had no invasion power, and her right to swap remaindermen ran only to qualified charities, which is not a general power of appointment. The Eleventh Circuit affirmed in part and reversed in part, holding the income interest reachable by creditors and the corpus beyond their reach.

The Support Trust Argument

Brown also argued her interest was exempt because the trust qualified as a support trust. A support trust directs the trustee to pay only as much income or principal as the beneficiary needs for support and education, and by its nature the beneficiary’s interest cannot be transferred. The unitrust agreement had no such terms: the trustee owed Brown exactly 7% of the trust’s value each year, no more if her needs grew and no less if they shrank, and she could spend the money however she chose.

The argument would have failed even if the trust had qualified. A support trust a settlor creates for her own benefit is no better protected than a self-settled spendthrift trust; under the Restatement rule, the settlor’s creditors reach the maximum amount the trustee could pay her or apply for her benefit.

How Florida Law Treats Self-Settled Trusts Today

The Eleventh Circuit decided In re Brown under Florida’s common-law trust rules; the opinion cites no statute for the self-settled principle. Florida’s Trust Code now reaches the same result by statute. Under section 736.0505(1)(b), the settlor’s creditors can reach the most an irrevocable trust’s trustee could distribute to the settlor or for her benefit. For Brown’s trust that measure would be the same 7% income stream, with the corpus still out of reach because no one could distribute it to her.

That measure is why outcomes diverge across self-settled trusts. In In re Rensin, the trust agreement let the offshore trustee distribute the entire corpus to the settlor, and a Florida bankruptcy court therefore held every trust asset attachable. A trust like Brown’s, whose trustee cannot touch the corpus, exposes only the settlor’s fixed income interest.

A self-settled trust in Florida gives the settlor no spendthrift protection for anything the trustee could pay her. Most states apply the same rule to self-settled trusts, and a Florida spendthrift trust therefore protects only beneficiaries other than the person who funded it. An asset protection trust for a Florida resident has to work within that boundary: whatever the trustee could pay the settlor stays exposed to the settlor’s creditors.

The Illinois Supreme Court cited In re Brown when it held that a settlor’s creditors reach everything the trustees could have distributed to him, a decision analyzed with the other domestic asset protection trust case law. Among the Florida asset protection case law decisions, In re Brown sets the measure of what a self-settled trust exposes: the interest the settlor kept, and nothing the settlor completely gave away.