Bacardi on the Rocks
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. §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.
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.
Spendthrift Trusts -
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 §§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:
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
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:
The court added:
It appears that the opinion in Bacardi was codified by Florida's Trust Code.21 F.S. §736.0503(3) provides an exception to spendthrift provisions, as follows:
Did the Florida Trust Code Overrule Bacardi for Discretionary Trusts? - When Florida enacted the Florida Trust Code in 2006, it included separate statutes for spendthrift trusts (§§736.0502 and 736.0503) and discretionary trusts (§736.0504). These statutes provide different rights to creditors. Florida law is clear that a spendthrift. provision is unenforceable against exception creditors including a trust beneficiary's child, spouse, or former spouse who has a judgment for support or maintenance.23 This article considers whether an exception creditor, such as a beneficiary's child, spouse, or former spouse, can reach a beneficiary's interest in a discretionary trust before such assets reach the beneficiary.
An attorney may believe that the exceptions to spendthrift protection under F.S. §736.0503(2) (entitled "Exceptions to Spendthrift Provision") could be avoided by creating a discretionary trust. A quick and literal reading of F.S. §736.0504 (entitled "Discretionary Trusts; Effect of Standard") could lead an uninformed attorney and client to the conclusion that trust assets left to a client in a discretionary trust in Florida are protected from even a creditor holding a judgment in the form of support because although the creditor may be an exception creditor and, therefore, able to reach assets in a spendthrift trust, §736.0504(2) states:
Whether or not a trust contains a spendthrift provision, if a trustee may make discretionary distributions to or for the benefit of a beneficiary, a creditor of the beneficiary, including a creditor as described in s. 736.0503(2), 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.24
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.
While Florida law allows certain creditors to attach present or future distributions from Florida spendthrift trusts to or for the benefit of a beneficiary under limited circumstances,25 the author believes it is uncertain whether exception creditors may garnish a beneficiary's interest in a Florida discretionary trust.
F.S. §§736.0503(2)(b) and 736.0504 may provide support to the position that a discretionary trust created for a beneficiary, such as Mark in our example, would be protected (i.e., a creditor cannot attach or otherwise reach the interest of a beneficiary as a result of the trustee's authority to make discretionary distributions to or for the benefit of the beneficiary).26 Based upon such position, an exception creditor could not attach or otherwise reach Mark's interest in a discretionary trust at least until Mark received his distribution from the trust. However, the 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.
A Discretionary Trust May Be Subject to a Writ of Garnishment - The court in Bacardi did not need to address how its ruling should apply to discretionary trusts. However, it did. The Florida Supreme Court opinion in Bacardi states:
Although Florida practitioners may believe that the intent of the Florida Legislature in its drafting of the Florida Trust Code was to follow Bacardi, with respect to both spendthrift trusts and discretionary trusts, an interpretation of the Florida Trust Code could leave an impression that an exception creditor could not garnish, attach, or otherwise reach assets held in a Florida discretionary trust, even upon distribution to a beneficiary subject to a judgment in favor of an exception creditor due to the phrase may not "attach or otherwise reach an interest."28 When reading the Florida Trust Code in conjunction with Bacardi, a court could determine that once a trustee, in the trustee's sole discretion, decides to make a distribution, an exception creditor of the beneficiary should be able to garnish such distributions before they reach the beneficiary. As noted below, Nevada and South Dakota have provided additional clarity in their statutes that specifically prohibit exception creditors from reaching discretionary trust assets.
Members of the Florida Trust Code Drafting Committee Have Different Views on Whether Bacardi Still Controls Discretionary Trusts - Attorneys involved in drafting the Florida Trust Code who are leaders in the Real Property, Probate and Trust Law Section of The Florida Bar have differing views on whether §736.0504 was intended to overrule Bacardi with respect to discretionary trusts. In preparation of this article, a number of the Florida Trust Code Committee members were asked whether an exception creditor could obtain a continuing garnishment against a beneficiary of a Florida discretionary trust. Excerpts from some of their responses are included below:
South Dakota - The South Dakota statute leaves little room for misunderstanding. For example, unlike Florida, where the word "reach" is not defined, South Dakota Codified Laws §55-1-24(6) states a creditor cannot reach assets in a discretionary trust and defines reach as follows: "[T]o subject the distribution to a judgment, decree, garnishment, attachment, execution, levy, creditor's bill or other legal, equitable, or administrative process, relief, or control of any court, tribunal, agency, or other entity as provided by law."30
South Dakota Codified Laws §55-1-35 states that a declaration in a trust that the intent of the beneficiary "shall be held subject to a spendthrift trust" is sufficient to restrain voluntary or involuntary alienation.31 South Dakota Codified Laws §55-1-35 additionally states:
South Dakota states that a beneficiary's support interest does not rise to the level of a property interest.33 "If the trust contains a spendthrift provision, notwithstanding the beneficiary's right to force a distribution with regard to a mandatory or support interest, no creditor may force a distribution [nor reach a present or future support distribution] with regard to a mandatory or support interest."34 Even if a beneficiary has an outstanding creditor, the trustee of a mandatory or support interest "may directly pay any expense on behalf of such beneficiary. No trustee is liable to any creditor for paying the expenses of a beneficiary of a mandatory or support interest."35
Further, a discretionary interest is explicitly defined as a "mere expectancy" in South Dakota: "No creditor may force a distribution with regard to a discretionary interest. No creditor, may require the trustee to exercise the trustee's discretion to make a distribution with regard to a discretionary interest."36 A South Dakota court cannot:
Nevada - Nevada's spendthrift trust statute dates back to 1939 and was significantly enhanced in 1999 by enlarging the class of permitted beneficiaries of a spendthrift trust and the types of spendthrift trusts to which the law of Nevada applied.38 There is no statutory allowance for exception creditors, and Nevada specifically disallows claims of spouses, former spouses, children, or dependents. Nevada Revised Statutes §166.090 provides that a "[p]rovision for the beneficiary will be for the support, education, maintenance and benefit of the beneficiary alone, and without reference to or limitation by the beneficiary's needs, station in life, or mode of life, or the needs of any other person, whether dependent upon the beneficiary or not."39 Nevada Revised Statutes §166.080 adds that "[t]he beneficiary or beneficiaries of such trust shall be named or clearly referred to in the writing. No spouse, former spouse, child, or dependent shall be a beneficiary unless named or clearly referred to as a beneficiary in the writing."40
The trustee's exercise of his or her discretion in a Nevada discretionary trust can only be reviewed if the trustee acts "dishonestly, with improper motive or fails to act."41 "Regardless of whether a beneficiary has an outstanding creditor, a trustee of a discretionary interest may directly pay any expense on the beneficiary's behalf and may exhaust the income and principal of the trust for the benefit of such beneficiary."42 Furthermore, creditors have an almost impossible task at trying to get a Nevada court to force a trustee to make a distribution out of a discretionary trust. Nevada Revised Statutes §163.417 provides:
Ultimately, based upon the facts described in the example above, Jack created a discretionary trust in Nevada, as the Nevada statute prohibits a judgment creditor in the form of spousal and child support from reaching trust assets or distributions therefrom. Nevada law addressed Jack's concern, whereas under Florida law, it appears an argument can be made that based upon Bacardi, Mark's exception creditors could potentially obtain a garnishment of distributions once made by the trustee. Nevada specifically permits payments from the trust directly for the beneficiary's benefit and specifically states that no spouse or former spouse shall be considered a beneficiary unless clearly named or referred to as such.
Remedies provided to exception creditors of spendthrift trusts and discretionary trusts vary from state to state. As new trust codes are enacted, issues such as the rights of an exception creditor to a continuing garnishment of a discretionary trust may come into dispute. It appears that Florida law could benefit from clarification on whether the beneficiary of a discretionary trust can be subject to a continuing garnishment that would cut the beneficiary off from any distributions the trustee decides to make. South Dakota and Nevada statutes provide greater clarity. Florida should consider its policy for exception creditors of discretionary trusts. If Bacardi is still intended to be the law for discretionary trusts, F.S. §736.0504 should be clarified. Attorneys practicing in Florida should advise their clients of the differences in treatment of exception creditors, especially when clients consult their lawyers as to how to protect their children or other beneficiaries from potential judgments in the form of support.44 Until Florida law is clarified, advisors should consider using trusts in states such as Nevada and South Dakota if judgments resulting from divorce are likely against trust beneficiaries.
1 See FLA. STAT. §§736.0502 and 736.0504.
2 Bacardi, 463 So. 2d at 221.
3 Miller v. Kresser, 34 So. 3d 172, 175 (Fla. 4th D.C.A. 2010). See also FLA. STAT. §§736.0502, 736.0503, and 736.0506.
4 FLA. STAT. §736.0503(2).
5 FLA. STAT. §736.0504(1).
6 FLA. STAT. §736.0103(3).
7 FLA. STAT. §736.0504(2). See also Miller, 34 So. 3d at 176.
8 FLA. STAT. §736.0504(2).
9 RESTATEMENT (SECOND) OF TRUSTS §155, comment b. (1959).
10 FLA. STAT. §736.0502(2).
11 FLA. STAT. §736.0502(3).
12 Bacardi, 463 So. 2d at 219-220.
13 ld. at 220.
16 ld at 220-21.
17 ld. at 220.
18 Bacardi, 463 So. 2d at 222. See also Landmark First Nat'l Bank v. Haves, 467 So. 2d 839, 840 (Fla. 4th D.C.A. 1985). In review of a spendthrift trust, in accord with Bacardi, the court held that the creditor may be entitled to a continuing garnishment against the trust, but that it will not be effective unless and until the trustee exercises discretion and elects to make payments to the beneficiary. The court may not order the trustee to make such disbursements.
19 Bacardi, 463 So. 2d at 222.
20 ld. (emphasis added).
21 See generally FLA. STAT. §736 (chapter effective July 31,2007).
23 FLA. STAT. §736.0503(2).
24 FLA. STAT. §736.0504(2).
25 FLA. STAT. §736.0503(3)
26 FLA. STAT. §736.0504(2)(b).
27 Bacardi, 463 So. 2d at 222-23 (emphasis added) (The Florida Trust Code preserves the ability for an exception creditor to reach Bacardi requirements that child support and alimony creditors reach a beneficiary's spendthrift interest "only as a last resort.").
28 FLA. STAT. §736.0504(2)(b). See Lerman v. Lerman, 2009 N.J. Super. Unpub. LEXIS 2093 (App. Div. Aug. 4, 2009) (quoting Bacardi in part. "The right of a third party to garnish assets of a beneficiary of a spendthrift trust is limited to disbursements from the trust and '[i]f disbursements are wholly within the trustee's discretion, the court may not order the trustee to make such disbursements.'").
29 See Bacardi, 463 So. 2d at 222 ("This state has always had a strong public policy favoring the enforcement of both alimony and child support orders... We have weighed the competing public policies and, although we reaffirm the validity of spendthrift trusts, we conclude that in these types of cases the restraint of spendthrift trusts should not be an absolute bar to the enforcement of alimony orders or judgments. Florida's interest in the enforcement of these awards under certain limited circumstances is paramount to the declared intention of the donor and the restraint of a spendthrift trust.").
30 S.D. CODIFIED LAWS §55-1-24(6) (emphasis added).
31 S.D. CODIFIED LAWS §55-1-35.
33 S.D. CODIFIED LAWS §55-1-42.
36 S.D. CODIFIED LAWS §55-1-43(1)-(2).
37 S.D. CODIFIED LAWS §55-13A-I05(a).
38 See Assembly Bill 469, as introduced, Mar. 10, 1999, available at http://www.leg.state.nv.us/Session/70th1999/bills/AB/AB469.pdf.
39 NEV. REV. STAT. §166.090(1).
40 NEV. REV. STAT. §166.080.
41 NEV. REV. STAT. §163.419(1).
42 NEV. REV. STAT. §163.419(4).
43 NEV. REV. STAT. §§163.417(1) and (3).
44 Alaska is another state that provides debtors protection from exception creditors. See also ALASKA STAT. §34.40.110. For a recent case alluding to the fact that the creditor's choice of law may not apply in certain situations, see American lnstitutional Partners LLC v. Fairstar Resources, Ltd., 2011 U.S. Dist. LEXIS 34385 (D. Del., Mar. 31, 2011). In Fairstar, Fairstar Resources, LTD, and Goldlaw PTY, LTD (collectively the "creditors") obtained charging orders in a Utah state court against American Institutional Partners, LLC, AIP Resort Development, LLC, and Peninsula Advisors, LLC, LLCs formed under Delaware law, and Mark Robbins (collectively "debtors"). Since the creditors sought to foreclose on the membership interests of the debtors, the debtors filed suit in Delaware, seeking a declaratory judgment that the creditors' foreclosures upon the debtors' membership interests were invalid under Delaware Law. Creditors responded by filing a motion to dismiss or transfer venue, arguing that Utah law applied. In denying creditors' motion, the Delaware court opined that even if the LLCs are registered to do business in Utah and have their principal places of business there, the plaintiff's (debtors) choice of forum outweighed the origin of the claim in Utah. The court noted that factors in deciding whether the case should be transferred to Utah consisted of preference of the plaintiff; preference of the defendant; where the plaintiff's claim arose; the physical condition and financial condition of the parties and the convenience of litigating in one jurisdiction as opposed to a different one; where the witnesses reside; where the documentary evidence is located whether the judgment would be enforceable; practical considerations, such as the ease and expense of trial; the caseload of the district court; local interests; public policy considerations; and whether a judge in one state may apply the law of the other state. Here, none of the factors stood out to tip the scale in favor of creditors.
Barry A. Nelson is founder of the law offices of Nelson & Nelson, P.A. and The Victory Center for Autism and Behavioral Challenges, both in North Miami Beach. He is Florida Bar board certified in both taxation and wills, trusts, and estates. He is a member of the American College of Trust and Estate Counsel and serves as chair of its Asset Protection Committee. He received his LL.M. and J.D., cum laude, from the University of Miami School of Law. The assistance of Michael Sneeringer in preparation of this article is acknowledged and appreciated. The title of the article was provided by Judith S. Nelson.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, George Joseph Meyer, chair, and William P. Sklar and Kristen Lynch, editors.
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