It's The Law: Spendthrift trusts offer protection

Question: I am working on my will and need some help. One of my children is not good with money. Actually, that is not quite true. He is really good at spending it, but not too good at earning or saving. I want to leave him part of my estate, but think he will fritter it away as soon as he gets it. My attorney recommends a spendthrift trust, but I am not sure what that means. Can you explain?

Answer: Let’s start with concept of a trust. Under a traditional trust, one person (the trustee) holds legal title to assets for the benefit of another person (the beneficiary). Although the beneficiary is the real party in interest, terms of the trust determine rights of the beneficiary and the powers and discretion of the trustee.

A trust can be established for a limited purpose, such as to pay for college education or medical expenses. A trust can also be established for the general benefit of a beneficiary. To ensure the intent of the person establishing the trustee (known as a grantor, settlor or even trustor) is met, careful drafting is required.

Since the beneficiary holds the real interest in a trust, Florida Statutes provide that a Court may authorize a creditor to reach a beneficiary’s interest in a trust by attachment of present or future distributions, but only to the extent the beneficiary’s interest is not subject to spendthrift provision. If properly drafted, the spendthrift provision stops creditors from intercepting payment to or for benefit of the beneficiary. Once the beneficiary receives a distribution from the trustee, creditors may attach it.

Spendthrift trusts have their basis in the English Common Law maxim that the intentions of a person creating a trust should be given maximum effect. That maxim allows enforcement of spendthrift provisions which restricted beneficiaries from voluntarily or involuntarily transferring or assigning their interest in a trust.

To be effective in Florida, a spendthrift provision must restrain both voluntary and involuntary transfers of a beneficiary’s interest. But, if properly drafted, creditors of the beneficiary can’t get to the assets in the trust.

The 2010 case of Miller v. Kresser shows how powerful a spendthrift provision can be. In the Miller case, the trustee had sole discretion about distribution of assets from the trust. The trust was established by a mother for benefit of her son and she appointed another of her sons as trustee. The trustee rubber-stamped the beneficiary’s requests for money from the trust so that the beneficiary had virtual control over trust assets. Despite that fact, the Court ruled the spendthrift provision stopped the beneficiary’s creditor from reaching

trust assets. The Court distinguished cases invalidating spendthrift provisions where a trust provided a beneficiary with express control to demand distributions or terminate the trust. In words of the Court, “we agree that the facts in this case are perhaps the most egregious example of a trustee abdicating his responsibilities to manage and distribute trust property, the law requires that the focus must be on the terms of the trust and not on the actions of the trustee or beneficiary.”

In the more recent case of Zlatkiss v. All American Team Concepts, Zlatkiss loaned Steinmetz $350,000.00, likely based on Steinmetz telling Zlatkiss about his $6,900,000,000.00 trust. Steinmetz didn’t repay the loan and Zlatkiss sued the trustee. Recognizing the likelihood of failure because of a spend thrift provision in the trust, Zlatkiss argued the statutes authorizing spendthrift provisions are unconstitutional because Florida’s Constitution provides courts must be open to every person for redress of any injury and justice administered without fail, denial or delay. The constitutional argument was rejected by the Court, which noted spendthrift trusts existed long before Florida’s Constitution and further that Florida’s Constitution did not guarantee collection, but only the right to bring a legal action.

Spendthrift trusts can be a powerful tool to protect the improvident. They can also protect those who do not appear to need protection from unexpected creditors, such as persons injured in automobile accidents. You should explore the concept in further detail with your attorney as it sounds like it will meet your desire to take care of your son and avoid the possible loss of that gift through mishandling by your son.

William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

Questions for this column can be sent to: William G. Morris, e-mail: wgmorrislaw@embarqmail.com or by fax, (239) 642-0722.

Other articles of interest can be viewed at our website, www.wgmorrislaw.com.

© 2013 marconews.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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