Bacardi on the rocks.

• Author: Nelson, Barry A.
• Position: Real Property, Probate and Trust Law

Those drafting estate planning documents frequently hear that one objective of a parent who wants all or a portion of a child's inheritance to pass into a trust, rather than outright, is to prevent the child's spouse from reaching such assets in the event of divorce. Beneficiaries of Florida trusts (as well as their lawyers) may be surprised that even when a discretionary trust is created to protect a child's inheritance, a former spouse may have rights as an exception creditor to reach trust assets that are protected from creditors, such as one holding a judgment resulting from a car accident, physician, or other professional malpractice or tort. Attorneys advising their clients that a discretionary trust governed by Florida law will protect a child's inheritance in the event of divorce, should a spouse or former spouse obtain a judgment in the form of support against such child as a result of a divorce, may be misguided.

This article explores discretionary and spendthrift trusts under the Florida Trust Code. (1) In the author's opinion, while it is clear that the Florida Supreme Court case of Bacardi v. White, 463 So. 2d 218 (Fla. 1985), was followed when the Florida Trust Code was enacted with respect to a spendthrift trust, it is unclear whether Bacardi was followed with respect to a Florida discretionary trust. (2) One reading F.S. [section]736.0504 may reasonably believe that a spouse with a judgment resulting from divorce cannot reach or otherwise attach the interest of their former spouse in a discretionary trust created under Florida law. However, based upon the discussion below, the author believes Florida Statutes should be clarified to reflect whether Bacardi was intended to be followed when the Florida Trust Code was enacted in 2006 or whether Bacardi is on the "rocks" for a discretionary trust.

Example: Residential Developer Cannot Pay Alimony Because He Cannot Make a Living

The following example is referred to throughout the remainder of this article. Divorced son Mark, a Florida domiciliary, who has a large support obligation to a former spouse, was a successful Florida residential homebuilder. As a result of the existing market downturn, Mark no longer has a source of income. Mark used all of his assets to satisfy bank guarantees on land that he stockpiled for future development. The land lost significant value, and Mark settled with his mortgage lender by using all of his liquidity in exchange for a release. Mark's father, Jack, a wealthy and elderly retiree, consults his adviser and asks whether the testamentary trust for Mark included in his existing estate plan could be reached by Mark's former wife who, as a result of Mark's inability to satisfy his unpaid alimony obligation to her, received a judgment against Mark in the form of support. Jack states that when Mark was financially secure, Mark was making timely payments to his former wife. However, like many others, Mark's ability to satisfy his debts was significantly curtailed when the value of his real estate vanished along with his capacity to earn a living as a developer. Jack is helping to support Mark (hopefully temporarily) and wants the comfort that upon Jack's death, Mark, and not Mark's former wife, would benefit from assets left in a discretionary trust for Mark.

Jack inquired about the benefits of using a spendthrift trust and/or a discretionary trust. He was advised that Mark's wife would be considered an "exception creditor" and could reach Mark's trust if it was a spendthrift trust. Jack was advised that Mark needed a discretionary trust. Jack asked his adviser to explain the difference between a spendthrift trust and a discretionary trust and whether either of them would protect Mark against his wife's judgment.

Distinction Between "Spendthrift Trusts" and "Discretionary Trusts"

* Spendthrift Trusts--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 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.... (3)

In Florida, a spendthrift provision is unenforceable against a beneficiary's child, spouse, or former spouse who has a judgment or court order for support or maintenance, a judgment creditor who has provided services interest in the trust, and a claim of a state or the United States. (4)

* Discretionary Trusts--Discretionary trusts often provide that the trustee, in the trustee's sole discretion, may determine whether a distribution will be made to a trust beneficiary. A discretionary trust often contains a spendthrift clause. A discretionary trust typically provides that distributions are "subject to the trustee's discretion whether or not the discretion is expressed in the form of a standard [an ascertainable standard] of distribution...." (5) Ascertainable standards are defined under the UTC and Florida Trust Code as standards relating to an individual's health, education, support, or maintenance pursuant to IRC [section][section]2041(b)(1)(A) or 2514(c)(1). (6) When a trust document provides the trustee with complete discretion over distributions, a creditor may only reach those distributions the trustee chooses to make. (7) The creditor cannot compel a distribution. (8)

The Restatement Second distinguishes discretionary trusts from spendthrift trusts as follows:

[A discretionary trust] is to be distinguished from a spendthrift trust and from a trust for support. In a discretionary trust it is the nature of the beneficiary's interest rather than a provision forbidding alienation which prevents the transfer of the beneficiary's interest. The rule stated in this [s]ection is not dependent upon a prohibition of alienation by the settlor; but the transferee or creditor cannot compel the trustee to pay anything to him because the beneficiary could not compel payment to himself or application for his own benefit. (9)

Florida Trust Code and Case Law

* Florida Spendthrift Trusts and Florida Exception Creditors--If the terms of a trust provide "that the interest of a beneficiary is held subject to a spendthrift trust, or words of similar import...," the terms are "sufficient to restrain both voluntary and involuntary transfer of the beneficiary's interest." (10)

A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this part, a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before receipt of the interest or distribution by the beneficiary. (11)

* Florida Case Law--Before enactment of Florida's Trust Code in 2006, Bacardi provided Florida common law on the rights of a former spouse (wife) to assets in a spendthrift and discretionary trust where the wife had a judgment in the form of support against her ex-husband. (12) Of great importance, and as discussed more fully below, the Bacardi case distinguished in its opinion the consequences of assets held in a spendthrift trust from assets held in a discretionary trust. In Bacardi, the former spouse of donor's son was granted alimony. (13) After the son ceased paying the requisite amount of alimony, his ex-wife obtained a judgment for the unpaid balance. (14) In aid of execution on her judgments, the ex-wife served a writ of garnishment on the trustee of the spendthrift trust created by the father for benefit of the son. (15) The son and trustee asserted that under the trust's spendthrift provision, the trust could not be garnished for the collection of alimony and attorneys' fees. (16) The issue on appeal to the Florida Supreme Court was whether disbursements from spendthrift trusts could be garnished to satisfy court-ordered alimony and attorneys' fees before such disbursements reach the debtor-beneficiary. (17) The Florida Supreme Court held that disbursements from spendthrift trusts, in certain limited circumstances, may be garnished to enforce court orders or judgments for alimony before such disbursements reach the debtor-beneficiary. (18)

Much of the Bacardi opinion centered on Florida's public policy in creating an exception to spendthrift trust provisions, specifically:

This state has always had a...