SPENDTHRIFT TRUSTS AND DISCRETIONARY TRUSTS: PROTECTING TRUST ASSETS FROM CREDITORS

A spendthrift trust protects the trust assets against most creditors. To be valid under Florida law, a spendthrift trust must restrain both voluntary and involuntary transfers of the beneficiary’s interest. In other words, one cannot validly set up a trust to keep creditors out while simultaneously allowing the beneficiary to freely transfer his interest in the trust. However, once the trustee makes a payment to the beneficiary of a spendthrift trust, creditors could make a claim on that payment.

Discretionary trusts give the trustee discretion in making payments to the beneficiary. Under Florida law, a discretionary trustee who refuses to make payments to the beneficiary generally cannot be forced to make those payments by a creditor. Therefore, when a trust includes a spendthrift clause and a discretionary clause, creditors may be lawfully excluded from ever reaching the trust assets. However, spendthrift and/or discretionary trust are susceptible to some creditors’ claims, e.g., alimony or child support.

Miller v. Kresser, 34 So. 3d 172 (Fla. 4th DCA 2010), is an example of the protection that Florida law offers to spendthrift trusts. Elizabeth Miller established a trust naming her son, James Miller, as the beneficiary and naming her other son, Jerry Miller, as trustee. The trust included a valid spendthrift clause and gave Jerry, as trustee, full discretion to make payments to James. In 2007, a creditor obtained judgment against James for $1,019,095.82. The creditor then sought to recover on his judgment from James’ trust.

The creditor attempted to pierce the spendthrift trust on the grounds that James, the trust beneficiary, exercised exclusive dominion and control over the trust assets. The creditor argued that while the spendthrift clause was legally valid in form, Jerry had turned over management and control of the trust to James. Jerry simply rubber-stamped James’ decisions regarding the trust. The court found that even though James had, in practice, dominion and control over the trust assets, he did not have express control, i.e., the trust did not provide for his control. Instead, Jerry had sole discretion to make payments. The creditor was therefore unable to reach James’ trust assets. The court also found that because the trust was also a discretionary trust, the creditor could not force Jerry to make a payment to James. “There is no law in Florida suggesting that a beneficiary’s creditors may reach trust assets in a discretionary trust simply because the trustee allows the beneficiary to exercise significant control over the trust.” Miller, 34 So. 3d at 176.

More recently, in Zlatkiss v. All American Team Concepts, LLC, 125 So. 3d 953 (Fla. 5th DCA 2013), another Florida district court found that the Florida statute upholding the validity of spendthrift trusts was constitutional. In Zlatkiss, the beneficiary of a spendthrift trust signed a personal guarantee on a $350,000 loan. When the beneficiary failed to repay the loan, creditors attempted to reach the trust assets by arguing that Florida’s protection of spendthrift trusts is unconstitutional because it bars creditors’ access to the courts. The court upheld the constitutionality of spendthrift trusts and found that the Florida Constitution protects a person’s access to the courts, but does not protect the ability to enforce a judgment.

These cases show that Florida law offer spendthrift trusts substantial protection from most creditors. Even when a trustee abandons his responsibilities to manage and distribute the trust property, Florida law focuses on the terms of the trust and not the actions of the trustee or beneficiary. The amount of protection offered to a trust therefore depends substantially on proper drafting. As long as the spendthrift/discretionary trust is properly drafted, most creditors will not be able to reach the trust assets.

Florida Probate Attorney Peter T. Mavrick represents clients in probate, trust, and guardianship litigation. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.