There are many ways that a settlor, or a person who creates a trust, can help to prevent creditors from attacking the assets he or she leaves a beneficiary through a trust or a will. One of the best ways to protect a trust’s assets is through a spendthrift clause.
In a trust, most beneficiaries are able to freely transfer their interest in the trust to someone else. A spendthrift provision prevents a beneficiary from being able to transfer their interest in the trust either voluntarily or involuntarily. While this puts a restraint on the beneficiary’s rights, it has the added benefit of preventing creditors from reaching these funds.
The provision must restrict the beneficiary’s ability to make voluntary and involuntary transfers. A restriction on just involuntary transfers will generally not be deemed valid by a court and will still allow creditors to reach the trust funds.
Florida as well as many other states permit spendthrift provisions in a person’s will or trust.
What is important to note about this asset protection is that it does not apply to assets that are distributed to the beneficiary by the trustee. This means that once a trustee distributes the assets of the trust to the beneficiary the creditors can reach these assets. In some cases, creditors cannot compel the trustee to make a distribution if the trust is discretionary. However, Florida’s trust code does not allow a trustee to withhold a distribution otherwise due to be paid to a beneficiary solely to protect the assets from creditors. If a trustee receives notice of a beneficiary’s creditors, and the trustee makes a distribution, the trustee may be required to pay the creditors directly.
Florida’s trust code also makes exceptions for other special creditors. This includes a beneficiary’s child, spouse, or former spouse who has a court order against the beneficiary. This means a spendthrift clause might not prevent the court from ordering the beneficiary to use his trust funds for child support or support of a former spouse. There is also an exception for creditors who are attorneys that have also provided services to help protect the beneficiary’s interest in the trust. A spendthrift clause also does not protect a trust’s assets from the federal or state government.
This trust agreement can also protect a beneficiary from wastefully spending her share of the trust. A settlor, or someone who creates the trust, may want to protect the beneficiary from her own tendency to make imprudent or wasteful financial decisions. Without a spendthrift provision it would be possible for a beneficiary to sell his interest in the trust to another for a quick profit. A spendthrift provision included for this purpose will usually be found in a discretionary trust, which allows the trustee to make distributions of the trust’s assets at his discretion.
For more information on how a spendthrift provision can suit your estate-planning needs, contact the Law Office of David Goldman today at 904- 685-1200.