It's The Law: Spendthrift trust can protect the beneficiary

Lockbox containing money, jewellery and will. Getty Images

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Lockbox containing money, jewellery and will. Getty Images

Question: I have a child who is terrible at money management. He is always broke, no matter how much he earns. If I leave him anything in my will I am afraid he will spend it quickly and unwisely. How do I address my concerns?

Answer: The simplest way to address your concern is not leave him anything in your will or trust. That is probably not what you really want to do. Instead, you might want to consider leaving a gift in trust, with a spendthrift clause.

You can create a trust in either your will or a living trust, but does not become effective or funded until you die. You would leave assets to a person or institution as trustee, to hold and to administer the assets on behalf of your child as beneficiary. You can include restrictions on use for the assets (i.e. education, medical care, food and clothing) or you can leave distribution to the complete discretion of the trustee.

The trust does not protect the assets automatically, as Florida law provides that the beneficiary of a trust can transfer his or her interest under the trust. The interest of a beneficiary is also reachable by the beneficiary’s creditors. If the trust contains a spendthrift clause, the beneficiary’s creditors will not generally be able to reach the trust assets, even if the beneficiary attempts to voluntarily transfer or assign. A spendthrift clause prohibits the beneficiary from voluntarily transferring or assigning his or her interest under the trust and bars creditors from claiming the assets prior to receipt by the beneficiary. Once the beneficiary receives distribution, there is little that can be done to protect the beneficiary from his or her own folly or his or her creditors.

In the 2010 case of Miller v. Kresser, Florida’s 4th DCA confirmed a spendthrift clause in a trust controls ability of creditors to reach the trust assets even when the beneficiary exercises de facto control over the trustee. In that case, the trustee had virtually turned over management of the trust to the beneficiary and the beneficiary made all important decisions concerning the trust, including investment and distribution. The trustee merely rubber stamped the beneficiary’s directions. A judgment creditor owed more than $1 million dollars sought to pierce through the trust because the beneficiary exercised virtually complete control. The court held language of the trust barred the creditor as the trust not only contained a spendthrift clause but also gave the trustee complete discretion over payment to the beneficiary.

Spendthrift trust protection is not unlimited. Florida’s Supreme Court carved out an exception for alimony and child support claims on public policy grounds. Where distribution is not discretionary but is mandated by formula or otherwise, a creditor may reach the mandated distribution. And, a person cannot create a spendthrift trust for his or her own benefit.

A spendthrift trust is an excellent way to protect a beneficiary. Even if a beneficiary does not have money problems, a spendthrift trust can protect the beneficiary from the unexpected (i.e. he runs over someone with his car). Choice of words is important in this context, so I recommend you meet with an experienced attorney to discuss options and draft your estate planning documents.

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.

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Comments » 1

conchsoup writes:

Why not begin having frank discussions with the child now about money management. Explain your concerns and schedule time to teach the child budgeting and saving and investing. We tend to treat money talk like we do sex talk. It should not be embarrassing, just matter of fact.

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