Bacardi: the hangover.

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

This article is a follow up to the March 2012 Florida Bar Journal article, "Bacardi on the Rocks." (1) The article suggested that former spouses of beneficiaries of Florida discretionary trusts may be able to obtain a continuing garnishment over trust assets intended for the beneficiary, despite what appeared to be contrary law enacted as part of the 2006 Florida Trust Code in F.S. [section][section]736.0603 and 736.0504. The article noted that those attorneys drafting estate planning documents frequently hear 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. The article suggested that 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 assets in a discretionary trust. The article stated that attorneys advising their clients that a Florida discretionary trust would 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.

Subsequent to the publication of the article, members of a Trust Law subcommittee of the Real Property, Probate and Trust Law Section of The Florida Bar convened to determine if any clarifications should be considered to F.S. [section][section]736.0503 and 736.0504, based upon Bacardi v. White, 463 So. 2d 218, 222 (Fla. 1985). A majority of the members believed that a white paper, dated October 13, 2006, explained the legislation to "correct unintended glitches in the Code and otherwise clarify the particular provisions addressed" was further evidence of the intent to override Bacardi. (2) The white paper explanation for the clarifying changes reads as follows: "[T]hese changes are intended to clarify that the protection provided to discretionary interests trumps the rights given to exception creditors in s. 736.0503(2) and that includes not only the inability to compel distributions but the right to attach a beneficiary's interest or expectancy in the trust." (3) A majority of the committee believed the white paper and statute were sufficiently clear. Possibly the portion of the current statute that provides that a creditor of a discretionary trust may not "attach or otherwise reach" was considered by the committee to be clear enough to protect the intended beneficiaries of discretionary trusts even from exception creditors. The first Florida court to review this issue held otherwise.

The article reads as follows:

The critical issue is whether F.S. 736.0504(2) means a spouse holding a judgment in the form of support cannot 1) force a distribution from a discretionary trust for the benefit of the spouse holding the judgment; and/or 2) garnish or otherwise reach or attach distributions from the discretionary trust before they are in the hands of the beneficiary ....

[T]he terms "attach" or "reach" are not defined in the Florida Trust Code and lend themselves to a number of interpretations as to whether a creditor may be able to garnish the interest of a discretionary trust once the trustee, in the trustee's sole discretion, is ready to exercise its discretion to make a trust distribution to the beneficiary. (4)

The article cited the Florida Supreme Court decision in Bacardi that, prior to the enactment of the Florida Trust Code in 2006, controlled the rights of a spouse or former spouse holding a judgment in the form of support resulting from dissolution of marriage against two types of Florida trusts: 1) spendthrift trusts where the trustee has an obligation to make distributions to a beneficiary based upon a stated standard; and 2) discretionary trusts where the trustee has broader discretion whether to make a distribution. Bacardi held that with respect to spendthrift trusts that were not discretionary, a spouse or former spouse with a judgment in the form of support could seek a court order to obtain distributions otherwise provided to the intended beneficiary. (5) For discretionary trusts, in which the trustee was not obligated to make present distributions to a beneficiary, Bacardi held that a court could not direct the trustee to make a distribution. However, if the trustee of a discretionary trust decides to make a distribution to the intended beneficiary, then such beneficiary's former spouse who has a judgment in the form of support may petition the court to grant a continuing garnishment. Thus, if the trustee wants to make a distribution to or for the...