A recent appellate court decision from the Fourth District Court of Appeal for Florida confirms that a properly designed fully discretionary spendthrift trust remains one of the most effective asset protection tools available to Florida residents. In Miller v Kresser., 2010 Fla. App Lexis 6152 (Fla. 4th DCA 2010) (decided May 5, 2010), the 4th DCA found, on facts that were very favorable to the creditor, that: 

"When a trust document provides the trustee with complete discretion over distributions, a creditor may only reach those distributions the trustee chooses to make.  §736.0504(2), Fla. Stat. (2009).  The creditor may not compel a distribution from the trustee or attach any interest in the trust before the trustee makes a distribution. Id.  This applies whether or not the trustee has abused his discretion in managing the trust. §736.0504(1), Fla. Stat. (2009).  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.  It is only when a beneficiary has received distributions from the trust, or has the express right to receive distributions from the trust, that the creditor may reach those distributions.  (Emphasis original)."

In Miller v. Kresser, James and Jerry Miller's mother had established separate trusts for the benefit of each of her sons, James and Jerry.  Jerry was named as the trustee for both trusts.  The trust for James' benefit was a completely discretionary trust.  Jerry, as the trustee, had the sole discretion to make distributions for his brother's benefit when he wanted, and in the amounts he wanted.  The trustee (Jerry) also had the right to terminate the trust and distribute all assets to James, as the beneficiary, at anytime Jerry wanted. 

Notwithstanding the trustee's total discretion to distribute all of the trust assets to James at anytime, the appellate court determined that James' judgment creditor (Kresser), could not force the trustee to make any distribution, and could not reach the assets of the trust until those assets were in fact actually distributed out to the beneficiary, James.  The court noted that: "[t]o conclude otherwise would ignore the realities of the relationship between a beneficiary and trustee of a discretionary trust - - the beneficiary always pining for distributions which he feels are rightfully his, and the trustee striving to allow only those distributions that coincide with the settlor's express intent, as set forth in the trust document.  It is the settlor's prerogative to choose the trustee she believes will best fulfill the conditions of the trust.  In the case before us, it is not the role of the courts to evaluate how well the trustee is performing his duties.  We are instead limited, by statute, to evaluating the express language of the trust to determine the extent of the beneficiary's control and the extent to which a creditor may reach trust assets."

One of the more interesting elements of this case involves the fact that Jerry, as Trustee of the trust for James' benefit, had essentially turned over the management of the trust assets to his brother James.  James was making investment decisions, exercised "significant control" over the trust, and "controlled all important decisions concerning the trust assets." Jerry, as the Trustee, never investigated James' decisions and actions to determine whether they were in the best interest of the trust, and in fact many of James' decisions were unwise.

Based on James' control over the trust assets, the creditor (Kresser) sought to "pierce" the protection of the trust and obtain the trust assets to satisfy his judgment, arguing that James' "control" over the trust was equivalent to the trustee having distributed the assets to James, or there was  "merger" of the legal ownership of the trust with the equitable ownership of James, to give James the equivalent of total ownership.  The appellate court rejected the argument.

The court found that for the merger doctrine to apply, Jerry, as trustee, would have to transfer legal title to James, as beneficiary, and only then would the legal title and beneficial title merge into one ownership interest by James, that then would be subject to the claims of James' creditors.  Since that did not happen in this case, there was no merger, and no basis for the creditor to access the beneficiary's interest in the trust property.

The appellate court's rulings were: (1) a discretionary trust, with a spendthrift provision, and with no mandatory distribution provisions, precludes a beneficiary's creditors from access to the assets of the trust to satisfy the beneficiary's obligations, even if the trustee has been irresponsible, breached his fiduciary duty to the trustmaker or the trust beneficiary, and has turned over the management of the trust assets to the beneficiary; and (2) even where the beneficiary of a discretionary spendthrfit trust has effectively controlled the trust assets, made investment decisions, and otherwise directed the management of the trust assets, if there is no express authority in the trust document allowing the beneficiary to distribute assets out of the trust, then the beneficiary's creditors are precluded from accessing trust assets to satisfy the beneficiary's obligations.

Practical Implications.

The practical implications of this case are quite significant from an asset protection perspective.  In its opinion, the court restated what is both statutory and common law in Florida.  "Florida law recognizes the validity of spendthrift trusts. . . . A spendthrift trust is a trust "created with a view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection. . . . .  When a trust includes a valid spendthrift provisions, a beneficiary may not transfer his interest in the trust and a creditor or assignee of the beneficiary may not reach any interest or distribution from the trust until the beneficiary receives the interest or distribution. . . However, when a trust requires mandatory distributions to a beneficiary, a creditor or assignee of the beneficiary may reach those distributions if the trustee has not made them within a reasonable time after the designated distribution date." (Emphasis supplied.)

If you want to protect your spouse, children, grandchildren, or whomever, from potential future creditor claims, then establish protective discretionary testamentary trusts for them through your own will or revocable trust (or establish irrevocable life time discretionary trusts).  Then, as is shown clearly by the Miller v. Kresser case, you can give the beneficiary the right to manage the assets of the trust, so the beneficiary can direct investments as deemed most appropriate for themselves, but name someone other the beneficiary as the distribution trustee with the sole discretion to make any distributions from the trust to the beneficiary.  Provide that only the "distribution trustee" has the right to distribute assets from the trust.  Make sure there are no provisions in the trust requiring mandatory distributions (most often found in the requirement to distribute income for "health, education, support and maintenance").  You then will have provided the beneficiary with the ability to "control" the investments (assuming that is something you want to allow) and trust assets, but you have also provided paramount protection of those assets from the beneficiary's creditors (including divorcing spouses - except in certain cases for court ordered child support).  Obviously, your selection of the distribution trustee is, as always with the selection of trustees, critical.

Discretionary trust planning is one of the greatest gifts you can give to your beneficiary, no matter how talented, how successful, how intelligent, how wonderful, how happily married, that beneficiary might be.  None of us are immune from lawsuits, unreasonable creditors, unexpected divorces, automobile accidents, twists and turns of the real estate market, or even just expressing our opinion about someone else that may result in a defamation law suit (I was once sued for defamation by a south Florida real estate syndicator for $50 million because I "defamed" him in front of numerous investors who were suing him for fraud - the case was dropped, but not until after I spent $10,000 on attorney's fees). 

If your current estate planning documents don't include discretionary testamentary trust planning for your beneficiaries, or if you have assets you want to transfer to others before your death, into an irrevocable inheritor's trust, you may want to consult with an estate planning attorney or asset protection attorney about how such a trust could help you achieve your planning objectives and goals.

Many clients today are interested not only in asset protection for their beneficiaries, but maximizing potential estate tax and generation skipping tax savings, through the use of a dynasty trust, or generation skipping trust.  In Florida, we now can establish a discretionary spendthrift trust that can continue for 360 years.  Through the use of gift, estate and generation skipping tax exemptions, and the leverage of survivorship life insurance, that trust can typically be funded to provide incredible benefits for successive generations of heirs throughout the 360 year term.  Such trusts provide maximum tax advantages, long term benefits, asset protection, and maximum flexibility.  If you would like to learn more, please contact us to schedule an appointment.