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Barry Nelson on Berlinger v. Casselberry:
Discretionary Trust Held to be Available to an Alimony Creditor
As published in Steve Leimberg's Asset Protection Planning Newsletter on 12/10/13
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By Barry A. Nelson

© 2013 Law Offices of Nelson & Nelson, P.A.

 
Steve Leimberg's Asset Protection Planning Email Newsletter - Archive Message #231
 
Date: 10-Dec-13
From: Steve Leimberg's Asset Protection Planning Newsletter
Subject: Barry Nelson on Berlinger v. Casselberry: Discretionary Trust Held to be Available to an Alimony Creditor
 

“The first Florida appellate decision addressing whether a former spouse who has a judgment in the form of support resulting from a dissolution of marriage can obtain a continuing garnishment, since enactment of the Florida Trust Code, recently was rendered in the case of Berlinger v. Casselberry. Berlinger is a big win for former spouses and a nightmare for intended trust beneficiaries and trust settlors who may have created a discretionary trust anticipating that the funds were exclusively for the use of the intended family member and not the ex-spouse of the family member. The facts of Berlinger made it easy for the appellate judges to determine that the public policy reflected in Bacardi v. White should continue in Florida, despite subsequent enactment of Florida Statutes Section 736.0504.”

Barry A. Nelson provides members with an important update on Florida trust law following the recent decision in the case of Berlinger v. Casselberry. Because of the significance of the Berlinger opinion, LISI will also provide members with commentary on Berlinger by Steve Oshins and Bob Keebler. Barry Nelson acknowledges and appreciates the assistance of Judith S. Nelson, Esq. and Michael A. Sneeringer, Esq. in preparation of this commentary.

Barry A. Nelson, a Florida Bar Board Certified Tax and Wills, Trusts and Estates Attorney, is a shareholder in the North Miami Beach law firm of Nelson & Nelson, P.A. He practices in the areas of tax, estate planning, asset protection planning, probate, partnerships and business law. He provides counsel to high net worth individuals and families focusing on income, estate and gift tax planning and assists business owners to most effectively pass their ownership interests from one generation to the next. He assists physicians, other professionals and business owners in tax, estate and asset protection planning. As the father of a child with autism, Mr. Nelson combines his legal skills with compassion and understanding in the preparation of Special Needs Trusts for children with disabilities. Mr. Nelson is a Fellow of the American College of Trust and Estate Counsel and served as Chairman of its Asset Protection Committee from 2009 to 2012. Mr. Nelson is named in Chambers USA: America’s Leading Lawyers for Business as a leading estate planning attorney in Florida. Since 2010, he has been listed as one of less than 10 lawyers receiving their highest rating of “Band 1” in the Florida Estate Planning category. Mr. Nelson has been listed in The Best Lawyers in America since 1995 and is a Martindale-Hubbell AV-rated attorney.

As the Founding Chairman of the Asset Preservation Committee of the Real Property, Probate and Trust Law Section of the Florida Bar from 2004-2007 he introduced and coordinated a project to write a treatise authored by committee members entitled Asset Protection in Florida (Florida Bar CLE 2008, 3rd Edition 2013). Mr. Nelson wrote Chapter 5 entitled “Homestead: Creditor Issues.” He is a past President of the Greater Miami Tax Institute. Mr. Nelson is a co-founder and current Board Member of the Victory Center for Autism and Behavioral Challenges (a not-for profit corporation) and served as Board Chairman from 2000-2008.

Now, here is Barry Nelson’s commentary:

EXECUTIVE SUMMARY:

When discussing trusts with clients it is common that parents want to protect children's inheritances from potential claims of former spouses.  Whether their children are divorced or parents are concerned that their child's marriage may fail in the future, the near universal objective is to make sure trust funds are there for children but not subject to claims of a child's former spouse. After all shouldn't a parent have the ability to make it absolutely clear that trust funds are to be distributed only to the intended beneficiary and not to a former spouse of a child? 

This commentary addresses the law in Florida prior to and upon adoption of Florida’s Trust Code in 2006, with respect to the rights of a former spouse holding a judgment in the form of support where the potential source of payment to satisfy the judgment is held in a discretionary trust created by a third party (i.e., typically parents) for the benefit of the judgment holder’s former spouse. While this commentary addresses Florida law and Florida’s adoption of the Uniform Trust Code, it serves as an example for those in a majority of states that have a public policy, like Florida, favoring enforcement of alimony and support orders.  

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FACTS:

Florida Law Prior to Enactment of Florida Trust Code 

Prior to enactment of the Florida Trust Code in 2006, the Florida Supreme Court decision in Bacardi v. White, 463 So. 2d 218 (Fla. 1985) 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: (a) spendthrift trusts where the trustee has an obligation to make distributions to a beneficiary based upon a stated standard; and (b) 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.   

For discretionary trusts, where 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 benefit of the beneficiary under Bacardi, the beneficiary's former spouse holding a judgment could cut off the proposed distributions before they reach the hands of the intended beneficiary.[i]  

Did the Florida Trust Code Override Bacardi

There is no official written indication as to whether the members of the Trust Law committee of the Real Property, Probate and Trust Law Section of the Florida Bar, who wrote Florida’s Trust Code, intended that Florida Statutes Section 736.0504, entitled “Discretionary Trusts; effect of standard,” override the Bacardi decision.[ii]

My March 2012 Florida Bar Journal article, entitled Bacardi on the Rocks, 86 Fla. Bar. J. 21 (Mar. 2012), included the comments of nine members of the Florida Bar’s Real Property, Probate and Trust Law Section who worked on Florida’s Trust Code drafting committee.  The comments reflect disagreement on whether Florida’s adoption of the Uniform Trust Code was intended to override Bacardi.  The article concluded that Florida law was unclear and therefore risky and that, with respect to potential claims of exception creditors (such as a former spouse), the laws of Nevada and South Dakota were much more clear and protective of discretionary trust beneficiaries who are subject to judgments in the form of support resulting from a dissolution of marriage (note that in 2013, Alaska passed legislation that in the author’s opinion, makes its laws comparable with Nevada and South Dakota).[iii] Delaware is also worthy of consideration.  In 2013, Delaware changed 12 Delaware Code Section 3536 to specifically exclude garnishment as a remedy of a creditor, and it specifically provides the trustee with authority to make distributions from a discretionary trust for the benefit of the beneficiary. (There has been some debate in LISI over the consequence of the Delaware Supreme Court case of Garretson v. Garretson, 306 A.2d 737 (Del. 1973), and that issue is beyond the scope of this commentary).[iv]

2nd DCA Holds Bacardi is Still the Law 

And now we come to the morning after; a “hangover” for asset protection attorneys. The first Florida appellate decision addressing whether a former spouse who has a judgment in the form of support resulting from a dissolution of marriage can obtain a continuing garnishment, since enactment of the Florida Trust Code, recently was rendered in the case of Berlinger v. Casselberry, Case No. 2D12-6470 (Fla. 2d DCA Nov. 27, 2013). Berlinger is a big win for former spouses and a nightmare for intended trust beneficiaries and trust settlors who may have created a discretionary trust anticipating that the funds were exclusively for the use of the intended family member and not the ex-spouse of the family member. The facts of Berlinger made it easy for the appellate judges to determine that the public policy reflected in Bacardi should continue in Florida, despite subsequent enactment of Florida Statutes Section 736.0504.   

The Berlinger Facts: The DCA Opinion Describes the Berlinger Facts as Follows: 

Bruce Berlinger appealed an order of the trial court granting Roberta Casselberry's, motion for contempt and motion for a continuing writ of garnishment over any disbursements made from the Berlinger Discretionary Trusts (the “Discretionary Trusts”) to or for the benefit of Berlinger. Although financially able to pay, Berlinger and his attorneys went to extraordinary lengths to avoid his support obligation to Casselberry. 

After thirty years of marriage, the spouses divorced in 2007. Pursuant to a marital settlement agreement ratified by the court and incorporated into the final judgment of dissolution, Berlinger agreed to pay Casselberry $16,000 a month in permanent alimony. Thereafter, Berlinger and his current wife enjoyed a substantial lifestyle sustained through payments made to them directly or on his behalf by the Discretionary Trusts including payments of all of his living expenses, mortgage obligations, property taxes, insurance, utilities, food, groceries, and miscellaneous living expenses. Although Berlinger continued to benefit from substantial distributions from the Discretionary Trusts, he voluntarily stopped paying alimony in May 2011. 

When Berlinger stopped paying alimony, Casselberry filed a motion to enforce and for contempt. Just prior to the hearing, the parties reached a settlement wherein Berlinger agreed to satisfy his alimony arrears by liquidating an IRA account. After the IRA liquidation, over $32,625.54 remained owing on the arrears judgment. The court issued writs of garnishment to SunTrust as trustee of the Discretionary Trusts. 

Around September 2011, Berlinger was provided a Visa card from SunTrust Bank to use for paying expenses not directly paid by the trusts. The trusts paid the Visa credit card bills, including expenses for travel, entertainment, clothing, medical expenses, grooming, gifts, and Berlinger's current wife's credit card bills. 

In January 2012, Casselberry filed a second motion for civil contempt and enforcement against Berlinger whereby the trial court issued writs of garnishment against SunTrust.  

On April 26, 2012, Casselberry filed a motion for continuing writ of garnishment against SunTrust seeking to attach the present and future distributions made to or for the benefit of Berlinger. Casselberry alleged that traditional methods of enforcing alimony were insufficient.  

On November 5, 2012, one day before the hearing on Casselberry's motion for continuing writs of garnishment, the new trustee (who replaced SunTrust) filed an action seeking a declaration that the family trusts at issue were discretionary trusts.

During the November 6, 2012, hearing, the new trustee testified that for the past year, the trustees had not made any payments directly to Berlinger. Instead, the trustees made payments on behalf of Berlinger and his current wife directly for their health insurance and household expenses, including: the mortgage, property taxes, homeowner's insurance, electricity, water, garbage, sewer, telephone, internet, lawn care, pool care, and pest control. The new trustee asserted that the trusts were discretionary and opined that the applicable trust statute, section 736.0504, prohibited any creditor, including Casselberry, from attaching any distributions paid on behalf or for the benefit of Berlinger. Neither Berlinger nor his current wife were employed and neither of them intended to look for work. 

Evidence regarding the Visa credit card given to Berlinger in September 2011 reflected all bills went to the trustee who paid them from the trust assets. Berlinger also took cash advances on the card to pay his maid, provide cash to his current wife, and to pay her personal expenses.

Berlinger argued Florida Statutes Section 736.0504 prohibited Casselberry from attaching distributions from a discretionary trust for his benefit.  Specifically, Berlinger said Florida Statutes Section 736.0504 specifically prohibits creditors from attaching distributions from a discretionary trust which are afforded greater protection from creditors under the Florida Trust Code.  

On November 27, 2012, the trial court entered orders granting Casselberry's motion for continuing writs of garnishment.       

Berlinger Holds that Bacardi Still Controls Florida Law 

The opinion in Berlinger was quite direct stating "[w]e conclude that the Florida Supreme Court's decision in Bacardi v White, 463 So. 2d 218 (Fla. 1985), is still controlling."[v]

The court analyzed Florida Statutes Sections 736.0503 and 736.0504, both enacted as part of the Florida Trust Code. Since the trust in Berlinger was a discretionary trust, the critical section was Florida Statutes Section 736.0504(2), which provides a former spouse may not compel distributions that are subject to a trustee’s discretion or attach or otherwise reach [emphasis added] the interest, if any, which the beneficiary may have. The opinion states: "The section does not expressly prohibit a former spouse from obtaining a writ of garnishment against discretionary disbursements made by a trustee exercising its discretion. As a result it makes no difference that the trusts are discretionary."[vi] The opinion notes that the spouse seeking the continuing garnishment was not seeking an order to compel the trustee to make a distribution or allowing the creditor to "attach" the beneficiary's interest. "Instead, she obtained an order granting writs of garnishment against discretionary disbursements made by a trustee exercising its discretion.”[vii]

The Berlinger opinion states: “Sections 736.0503 and 736.0504 codify the Florida Supreme Court's holding in Bacardi. Neither section protects a discretionary trust from garnishment by a former spouse with a valid order of support;” and goes on to say that Florida's public policy favoring spendthrift trusts protecting a beneficiary’s income "gives way to Florida's strong public policy favoring enforcement of alimony and support orders. See Gilbert v. Gilbert, 447 So. 2d 299, 302 (Fla.2d DCA1984).”[viii]

The circuit court order referred to in the Berlinger DCA Opinion adopted the approach laid out in Bacardi. The circuit court order on the continuing writs of garnishment stated: "all distributions made directly or indirectly to, on behalf of, or for the benefit of Berlinger by the trustees of all the Berlinger Discretionary Trusts to which Berlinger was a beneficiary would be made payable to Casselberry unless, at the time of any future distributions, there was no alimony or alimony arrears owed.”[ix] Further, the circuit court order provided that if the trustee wished to make distributions to Berlinger beyond the amount of the outstanding amount of alimony, the trustee had to seek court approval before doing so to ensure that there remained sufficient assets in the trust to secure the continued payments of alimony.[x]

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COMMENT:

As noted in the author’s two earlier articles on this issue, Bacardi on the Rocks and Are Trust Funds Safe From Claims For Alimony or Child Support?,[xi] it was unclear whether the Florida Trust Code codified or overrode Bacardi.  The articles suggested this issue be addressed legislatively so those drafting Florida trusts and their clients would not get caught by surprise.  Attorneys and politicians can debate whether Bacardi should continue to be Florida law or instead whether parents should be able to fully protect their children’s inheritance from claims of former spouses.  Four states, Alaska, Delaware, Nevada and South Dakota, appear to provide greater protection for discretionary trust beneficiaries.  In light of Berlinger, Florida, as well as other states that either (i) have not clearly indicated whether a former spouse with a judgment in the form of support can reach discretionary trust assets or (ii) provide enhanced protection for exception creditors (such as for those creditors holding judgments in the form of child support or support resulting from a dissolution of marriage), should determine if their state statutes need clarification and if so, what direction their state should go with respect to the conflicting policies of protecting discretionary trust beneficiaries as compared to favoring enforcement of alimony and support orders.   

The Hangover Remedy/What to do Now? 

Members of the Florida Bar’s Real Property, Probate and Trust Law Section should create a committee to see if there is a consensus on whether Bacardi should remain the law in Florida for both spendthrift trusts and discretionary trusts.  If so, Florida Statutes Sections 736.0503 and 736.0504 should be clarified.  If instead the consensus is to override Bacardi and Berlinger, Florida Statutes Sections 736.0503 and 736.0504 should be clarified by specifically stating that continuing garnishments are not permitted as a remedy to secure payments of alimony for the beneficiary of a discretionary trust, and payments should be authorized by a trustee directly to or for the benefit of a beneficiary, even one subject to a spousal support order.  In such event, former spouses should be excluded as beneficiaries of discretionary trusts unless the creator of the trust intended a former spouse of a trust beneficiary to be an included beneficiary and so directs in the trust instrument. 

What is the Best Option Now for Florida Residents? 

Until Florida law and public policy regarding discretionary trusts and their protection (or lack thereof) from a beneficiary’s former spouse who has a judgment in the form of support is determined, parents desiring maximum protection for their children should consider creating and administering discretionary trusts in Alaska, Delaware, Nevada or South Dakota. Those clients who have already informed their attorneys of such concerns and objectives should be advised of Berlinger and the benefits of updating their estate planning documents by creating discretionary trusts in states such as Alaska, Delaware, Nevada and South Dakota.  

What can be Learned From Florida’s Experience? 

Remedies provided to exception creditors of spendthrift and discretionary trusts vary from state to state. For those states that adopted UTC sections 503 and 504 without modification, trusts are subject to limited claims of a spouse, former spouse or child. Greater analysis is required for states that modified or adopted these sections. In light of Berlinger, it appears that even states that modified the UTC to provide that exception creditors have no rights to discretionary trust assets may find that courts will follow law existing as of enactment unless the adoption provides the intent to modify existing law. It appears that courts will go out of their way to protect spouses with judgments in the form of support where the law is not absolutely clear. For these reasons, states such as Alaska, Delaware, Nevada and South Dakota are an important consideration.

Alaska Update 

Alaska modified its discretionary trust statute effective September 9, 2013, and its changes put Alaska in the mix for consideration to avoid cases like Berlinger.[xii] Alaska Statutes Section 34.40.113 entitled “Discretionary Interests in Irrevocable Trusts” is an excellent example of how to clarify the rights of trustees, beneficiaries and creditors of discretionary trusts where the paramount state public policy favors protection of beneficiaries of discretionary trusts, rather than enforcement of alimony and support orders. 

Can Trust Situs and Administration be Moved? 

One issue that is beyond the scope of this article but gives reason for concern is whether the trustee of a Florida discretionary trust can move the trust situs (post Berlinger), after the beneficiary is subject to a judgment for support, especially where the beneficiary is not current on such alimony or support obligations. In other words, is it possible that such a situs change of the trust could be considered a fraudulent conveyance?  Best practice may be to assure trust settlors are aware of the Berlinger and Bacardi attacks and leave it up to the settlor of the trust to decide whether or not to incur the expense and administrative burdens of creating a trust and then administering the trust in a state other than Florida.  Until these issues are resolved, disclosing the Berlinger case to clients and the above options should be considered.  Whether Florida Bar members are willing to address Bacardi and Berlinger head on to arrive at a clear consensus is uncertain. Bacardi appears to be the law in courts within the Second District Court of Appeal of Florida, and possibly other cases will follow.  It is time to address the issues legislatively.  Among the difficult issues are: 

1. Should a parent or other settlor be able to create a trust to protect a child or other beneficiary such that the trust funds are held exclusively to benefit the beneficiary and specifically prohibit any distributions that would benefit a former spouse?   

2. Should the holder of an unsatisfied judgment in the form of support as a result of a dissolution of marriage be able to garnish a discretionary trust, held for the benefit of a former spouse so that if a distribution is made to or for the benefit of the former spouse, the judgment holder can cut off the funds through a continuing garnishment?   

It may be that the facts in Berlinger were simply too powerful for the Second District Court of Appeal of Florida to ignore; the trust assets allowed the beneficiary to live a lavish and luxurious lifestyle while refusing to satisfy his obligation to pay a judgment in the form of support held by an ex-spouse. This was a very compelling scenario for the Second District Court of Appeal of Florida, and it used the opportunity to state its position on an issue that not all asset protection attorneys even felt was unclear. For better or worse, it is clear now. At least unless and until another District Court of Appeal in Florida, presented with a different set of facts, rules otherwise or the legislature changes the law. Well, it’s time for a drink.  To be continued!

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Barry Nelson

TECHNICAL EDITOR: DUNCAN OSBORNE

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CITE AS:

LISI Asset Protection Planning Newsletter #231 (December 10, 2013) at http://www.leimbergservices.com  Copyright 2013 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission. 

CITES:

Berlinger v. Casselberry, Case No. 2D12-6470, 6 (Fla. 2d DCA Nov. 27, 2013). 

CITATIONS:

[i] See Bacardi v. White, 463 So. 2d 218, 222 (Fla. 1985) (“If disbursements are wholly within the trustee's discretion, the court may not order the trustee to make such disbursements. However, if the trustee exercises its discretion and makes a disbursement, that disbursement may be subject to the writ of garnishment.”). 

[ii] See Fla. Stat. § 736.0504:

As used in this section, the term "discretionary distribution" means a distribution that is subject to the trustee's discretion whether or not the discretion is expressed in the form of a standard of distribution and whether or not the trustee has abused the discretion.

(2)  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.

(3)  If the trustee's discretion to make distributions for the trustee's own benefit is limited by an ascertainable standard, a creditor may not reach or compel distribution of the beneficial interest except to the extent the interest would be subject to the creditor's claim were the beneficiary not acting as trustee.

(4)  This section does not limit the right of a beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard for distribution.

[iii] For a more detailed discussion on discretionary and spendthrift trusts under Article 5 of the Uniform Trust Code see Nelson, Are Trust Funds Safe From Claims For Alimony or Child Support?, 152 Tr. & Est. 15 (Apr. 2013).

[iv] Compare Oshins & Keebler, Steve Oshins & Bob Keebler on the 40th Anniversary of Garretson v. Garretson: Spendthrift Trusts and Divorce Protection, LISI Asset Protection Planning Newsletter #217 (Jan. 10, 2013) at http://www.leimbergservices.com, with Borowsky & Wallace, Jocelyn Borowsky & Jennifer Wallace on In re Garretson, LISI Asset Protection Planning Newsletter #221 (Feb. 28, 2013) at http://www.leimbergservices.com.

[v] Berlinger v. Casselberry, Case No. 2D12-6470, 6 (Fla. 2d DCA Nov. 27, 2013).

[vi] Id. at 9.

[vii] Id.

[viii] Id.

[ix] Id. at 6.

[x] Id.

[xi] See Nelson, supra note iii.

[xii] For extensive articles discussing the changes to Alaska law, see Blattmachr, Chapman, Gans, & Shaftel, New Alaska Law Will Enhance Nationwide Estate Planning-Part 1, 40 Est. Plan. J. 3 (Sept. 2013) and   Blattmachr, Chapman, Gans, & Shaftel, New Alaska Law Will Enhance Nationwide Estate Planning-Part 2, 40 Est. Plan. J. 20 (Oct. 2013).

 

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