IRREVOCABLE SPENDTHRIFT TRUSTS
Trusts are popular estate planning instruments that may bring many benefits both during lifetime and in the case of death. Some common reasons for setting up a trust include the avoidance of costs and time consumption of probate proceedings, property management for those who cannot or do not wish to manage the property themselves, continuance of property management after death or during disability, and saving of taxes and protection of the assets against the claims of creditors. However, there are several types of trusts and not all of them provide these benefits to the same extent.
The revocable trust is the most flexible one as the creator (settlor) can at modify the terms of the trust or completely revoke it at any time. See Fla. Stat. § 736.0602. However, the assets transferred into such trust are still considered personal assets of the settlor and accordingly, can be reached by his or her creditors. See Fla. Stat. § 736.0505(1)(a). Therefore, the revocable trust is not an ideal solution for asset protection purposes. Upon death of the settlor, this trust becomes irrevocable, meaning that the rules for asset distribution can no longer be changed. It is also possible to make a trust irrevocable from the outset and to afford protection against creditors by adding a spendthrift provision. See Fla. Stat. § 736.0502.
A spendthrift provision is valid only if the provision restrains both voluntary and involuntary transfers of a beneficiary’s interest. See Fla. Stat. § 736.0502. The assets in the irrevocable trust are no longer considered the assets of the settlor and as such, are protected against creditors’ claims. If the trust has a spendthrift provision, the creditor or assignee of the beneficiary also cannot attach, execute, or otherwise reach the distribution by the trustee before the beneficiary receives it. The protection applies as long as the assets stay in the trust. When the trustee makes a distribution to the beneficiary, the distributed assets are no longer protected.
This protection is also awarded in discretionary trusts, where the distribution is subject to the trustee’s discretion. See Fla. Stat. § 736.0504. Creditors cannot compel the trustee to make a discretionary distribution if the distribution could be seized by the creditors. This also applies in situations where the trustee is also a beneficiary, if the benefit is limited by some ascertainable standard such as education or maintenance of the beneficiary. In a self-settled trust where the settlor is also the beneficiary, a creditor or assignee of the settlor may reach the whole amount that can be distributed for the settlor’s benefit. See Fla. Stat. § 736.0505(1)(b). Because the assets in irrevocable trusts are no longer owned by the settlor, the property also cannot be taxed when the settlor dies.
The irrevocable trust will not shield assets from all creditors. The spendthrift provision is unenforceable against (1) a beneficiary’s child, spouse, or former spouse who has a judgment for support or maintenance; (2) a creditor who has provided services for the protection of a beneficiary’s interest in the trust; and (3) the government. See Fla. Stat. § 736.0503. However, marital assets acquired during marriage and subsequently transferred into the irrevocable trust are not subject to equitable distribution upon divorce. Nelson v. Nelson, 206 So. 3d 818, 820 (Fla. 2d DCA 2016).
Irrevocable trusts are far less flexible than revocable trusts. After its formation, an irrevocable trust generally cannot be amended, modified, or revoked. Certain limited flexibility may be established in the trust agreement or by the exercise of the power of appointment. The courts, however, may allow termination or modification of the trust when the original purpose of the trust is impaired and the settlor and all beneficiaries consent. See Peck v. Peck, 133 So. 3d 587, 591 (Fla. 2d DCA 2014).
If someone you know has an issue regarding revocable or irrevocable trusts, or if you yourself would like to take appropriate action to avoid unforeseen complications with your own trust instrument, please do not hesitate to contact the law offices of Chepenik Trushin LLP. The experienced attorneys at Chepenik Trushin are ready, willing, and able to assist with such estate planning needs. Please feel free to contact us for an initial consultation. Bart Chepenik, 305-613-3548, Brad Trushin, 305-321-4946, Offices (305) 981-8889.