Trusts That Fail To Protect Against Creditors

Trusts may be an effective asset protection tool if properly drafted. Setting up a trust to hold your own property for your own benefit (such as a living trust) provides no asset protection benefits under Florida law. However, if a debtor is a beneficiary of a trust set up by another family member for the debtor’s benefit, the debtor’s beneficial interest in the trust is protected from the debtor’s creditors if the trust agreement has what is referred to as aspendthrift clause” or “anti-alienation clause.” These clauses say, essentially, that a beneficiary may not assign his interest, voluntarily or involuntarily, for the benefit of another party.

However, if the trustmaker makes the debtor/beneficiary the successor trustee of the trust so that after the trustmaker’s death the beneficiary is wearing the hats of trustee and beneficiary, asset protection benefits of the spendthrift clause may be lost. Spendthrift provisions work, in part, because most trust agreements give the trustee, or successor trustee, discretion over whether or not to distribute trust income and principal to the beneficiaries.

The debtor’s ability as trustee to make discretionary distributions to himself may subject the debtor to a court order requiring distributions of trust property that may be seized by the debtor’s judgement creditors. For the protection of trust beneficiaries, it is better for trust agreements to require successor co-trustees, one of whom must be unrelated to the beneficiary.