Generally, a creditor can reach a beneficiary’s interest in a non-discretionary trust to satisfy the beneficiary’s debts or obligations. However, a trust that is either a spendthrift trust or a discretionary trust, may offer significant protection from the beneficiaries’ creditors, or maybe not.
A spendthrift trust is a trust created to fund the maintenance of another while securing those funds against the beneficiary’s squandering or incapacity for self-protection. Miller v. Kresser, 34 So. 3d 172, 175 (Fla. 4th DCA 2010). “When a trust includes a valid spendthrift provision, 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.” Id. On the other hand, a discretionary trust grants the trustee the sole discretion to determine whether a distribution will be made to a beneficiary. Restatement (Third) of Trusts § 50, cmt. a (2003).
A spendthrift trust is created by the inclusion of a spendthrift provision, which is defined as “a term of a trust that restrains both voluntary and involuntary transfer of a beneficiary’s interest.” Fla. Stat. § 736.0103(19). A beneficiary’s interest in a spendthrift trust is entirely protected from transfers by the beneficiary or the beneficiary’s creditors. Fla. Stat. § 736.0502(2).
There are three exceptions to a spendthrift provision: (1) a spousal/child support order/judgment; (2) a judgment creditor who provided services for the protection of the beneficiary’s interest in the trust; and (3) a “claim of this state or the United States to the extent a law of this state or a federal law so provides.” Fla. Stat. § 736.0503(2).
The third exception is a grey area because there are no Florida cases interpreting what a “claim of this state or the United States” is under Florida Statutes Section 736.0503(2). A tax lien would most likely fall under this exception, but it is not clear what other claims qualify. Regardless, it is clear from the language of the statute that to be successful in asserting this exception, the creditor must establish both (a) a claim of this state or the United States and (b) that a Florida or federal law permits such garnishment. Unless one of the exceptions applies, spendthrift protection controls and the creditor will be unable to reach the beneficiary’s interest in the trust.
Separate from spendthrift protections is the protection that a discretionary trust provides. When a trustee may make discretionary distributions to or for the benefit of a beneficiary a “creditor . . . may not (a) Compel a distribution that is subject to the trustee’s discretion; or (b) Attach or otherwise reach the interest, if any, which the beneficiary might have as a result of the trustee’s authority to make discretionary distributions to or for the benefit of the beneficiary.” Fla. Stat. § 736.0504(2). Unlike the spendthrift protections, there is no exception to the prohibition against compelling a distribution or attaching/reaching an interest in a discretionary trust.
However, in the recent case of Berlinger v. Casselberry, 133 So. 3d 961 (Fla. 2d DCA 2013), the Second District Court of Appeal affirmed the trial court’s ruling that granted a continuing writ of garnishment to a former wife to garnish the present and future distributions from a discretionary trust to her former husband for outstanding alimony payments. The Court held that the alimony exception to spendthrift provisions applied and rendered the spendthrift provision unenforceable. Id. at 965-966. The Court stated that where a valid exception exists that makes a spendthrift provision unenforceable, discretionary distributions made by the trustee are subject to garnishment, regardless of the language of section 736.0504(2), Florida Statutes. Id. The Court seemed to find that an exception to a spendthrift provision is also an exception to the protections offered by a discretionary trust. The Court made this ruling despite there being no exception creditors in the context of a discretionary trust per Section 736.0504. In fact, Section 736.0504 specifically notes that the prohibition from attaching or otherwise reaching an interest applies “[w]hether or not a trust contains a spendthrift provision” and applies to “a creditor as described in s. 736.0503(2).” Fla. Stat. § 736.504(2). It is possible that the Court’s decision in Berlinger is driven by public policy and that it may not apply in a non-alimony case, but that is certainly not clear. The Court stated, “Florida has a public policy favoring spendthrift provisions in trusts and protecting a beneficiary’s trust income; however, it gives way to Florida’s strong public policy favoring enforcement of alimony and support orders.” Id. at 966.
A trust can be a spendthrift trust without being discretionary; a trust can be discretionary without being a spendthrift trust; a trust can be neither; or a trust can be both—these are separate and distinct characteristics of a trust.
Brandon D. Bellew, Esq. is the current President-Elect of the Clearwater Bar Association, a member of the Executive Council of the Florida Bar’s Real Property, Probate and Trust Law Section, and a partner at Johnson, Pope, Bokor, Ruppel & Burns, LLP. He focuses his practice in the area of probate and trust litigation. Caitlein J. Jammo, Esq. is the Past President of the Clearwater Bar Association Young Lawyers’ Division and an associate at Johnson, Pope, Bokor, Ruppel & Burns, LLP. She also focuses her practice in the area of probate and trust litigation.