Debtor As Both Trust Beneficiary and Trustee
I received an email from Florida attorney Tye Klosster concerning asset protection of a trust established for the benefit of a Florida debtor where the trust agreement names the same debtor/beneficiary as trustee and also includes standard spendthrift protection. Such trust arrangements are often set up by parents' living trusts for the benefit of their children as part of the parents' estate planning. Otherwise stated, the question is whether trust beneficiary enjoys protection from standard "spendthrift provisions" where the beneficiary serves as trustee with discretion to make distributions to himself.
I think that the trust beneficiary cannot rely on creditor protection where the trustee also has discretion to make distributions. My reasoning is that even though the trust document states that distributions are discretionary a judge could order the trustee/debtor to distribute trust assets where they could be subject of creditor seizure. Alternatively, the creditor could argue the trustee's discretionary power is an asset subject to the creditor's levy. The creditor could take over the power and distribute all trust property to the debtor/beneficiary where the property would be subject to the creditor.
Mr. Klooster referred me to a Florida bankruptcy case which he says held that Florida trusts cannot enjoy spendthrift protection if the same debtor is trustee and beneficiary. (In re Bottom, 176 BR 950). If asked , most parents who want to leave assets to children in trust would want the same assets protected from their childrens' creditors. One alternative is for the parents to name an independent trustee so that the beneficiary has no powers to effect distributions. I find that many parents want to give their children at least limited control over their trust property and to that end my trust documents require the beneficiary to select their choice of an independent co-trustee over their trust share. I almost always provide that no trustee can make any distribution for the benefit of a beneficiary's creditors or former spouses. I believe the combination of these provisions provides reasonable asset protection with sufficient input from the beneficiary for estate planning. But, I may be wrong; different lawyers will have different techniques.
Mr. Klooster pointed out in a follow up email that this issue is a good example of how asset protection goals often conflict with estate planning goals. He states correctly that from an estate planning and tax standpoint there is no harm in having a beneficiary serve as sole trustee so long as discretionary distributions are limited for health, education, maintenance, and support.
This is an interesting issue and comments would be most
posted by Jonathan Alper, asset protection and banrkuptcy lawyer, Orlando, Florida
I actually practice in Chicago now, but because a lot of our clients relocate to Florida I try to keep up to date on Florida law.
In recent years the "beneficiary controlled trust" concept has become very popular. Upon the death of the survivor, the trust is basically split into separate shares for the children and maintained in separate so-called "Discretionary Trusts". In the trust, distributions can be made to the beneficiary for his health, education, support and maintenance ("HESM"), or if there is another Co-Trustee who is not the beneficiary, the other Co-Trustee can make distributions for his "best interests" (or for whatever reason). Typically the child has the ability to serve as sole Trustee at say age 30, or appoint himself and another (his best friend or spouse) as Co-Trustees. Note that the beneficiary's children, while contingent remaindermen, are not current beneficiaries of the trust (they have a contingent interest subject to divestment because the beneficiary also has a special power of appointment).
I question whether a trust's spendthrift provision will be respected by a court where the sole current beneficiary is also the sole Trustee, even if the distributional standard is limited to an ascertainable standard such as HESM.
The Restatement Third of Trusts, comment g, provides that if the sole beneficiary is the sole Trustee, the spendthrift provision is not valid and therefore it is subject to creditors (even if limited to HESM).
The UTC was originally silet on this issue, but then in 2004 amended the Code to hold that the spendthrift protection will be upheld in a sole beneficiary-sole Trustee context if the distributions are limited to HESM.
What are the courts saying?
In re Bottom, 176 B.R. 950 (Bankr. N.D. Fla. 1994): "The Florida courts have indicated that a spendthrift trust is defined to be those trusts that are created with a view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection. Such a policy is not served by the facts of the case at bar. Because [debtor] is named as the sole Trustee of his own trust, the only one that can guard [debtor] from his own improvidence is [debtor] himself. It is for this reason that the trustee and the sole beneficiary cannot be one in the same under Florida law."
In re McCoy, 2002 WL 1611588 (Bankr. N.D. Ill. 2002): In the case the court held that debtor had too much control over the trust. He was the sole Trustee and the primary beneficiary of the trust (children were also beneficiaries). Distributions were limited HESM. Court held that he alone could determine what was necessary for his HESM; that is, "there is nothing in the Family Trust to prevent Debtor, as trustee of the Family Trust, from making a determination that any particular sumptious luxory or indulgence is required or desirable for his health maintenance or support" . . . . Held, part of bankruptcy estate.
In re Coumbe, 304 B.R. 378 (9th Cir. 2003): Under Arizona law, if the sole beneficiary is the sole Trustee, the trust is not a spendthrift trust.
Morrison v. Doyle, 582 N.W.2d 237 (Minn. 1998): Opposite holding. The court, in relying on many Minnesota statutory rules (which I don't believe we have in Illinois or Florida) basically held that if limited by HESM you have no problem on this issue.
I just worry that in moving toward the "beneficiary controlled trust" concept that we have not focused on creditor protection enough. Rather, most estate planning attorneys focus too much (or only) on estate tax inclusion. If limited by HESM, the power is not a general power and therefore not included in the gross estate. But what about creditor protection? The Restatement and the cases cited above should give us some pause.
It is my belief, at least at the moment, that we should be advising clients of the potential problem with beneficiary-controlled trusts. We should be explaining that these cases exist and that if the sole beneficiary is the sole Trustee a creditor may very well be successful in arguing, particular in outrageous cases (say a tort case or a case where debtor is not respecting HESM), that the trust should be part of bankruptcy estate. We should also advise that if the beneficiary is only a Co-Trustee or the beneficiary's children are also named as current beneficiaries, that these problems go away.
Anytime there is too much control by a sole beneficiary-sole Trustee you are rolling the dice. Perhaps we need to pursue legislation similar to the 2004 amendment to the UTC in our own jurisdictions that allows sole beneficiary-sole Trustee if limited by HESM. This would comport law with current estate planning practices.
In the meantime, clients need to be advised that if they are looking for greater creditor protection the sole beneficiary should not be the sole Trustee.
HI
I have a question and would like to know if you could help me with this and email me back?
My mother died in 2005. Her last husband is the sole trustee at this time.
Is it true that we the surviving children can ask for an accounting of their trust?
We have been told we can but I would like to know what the law is for that. My mother lived in Calif when she died.
Our stepfather is not a person who is good with money and we are worried what he is doing with the rental properties he has sold that my mother and he owned. One of those homes was in her name only and I am not sure how he was able to sell it because as far as we have been able to find out she never transfered it into community property? Please advise.
Desperate in Washington!
Patty RAmos
pscramos@yahoo.com
Our parents have both died within the past several weeks. Our older brother is both beneficiary and sole trustee. We have been trying to get information on balances, expenditures, credit card usage, etc. Recently, he has sent us a couple bank statements, but a payment to a credit card co. or Sears doesn't tell us what the money is used for. He also witholds current investment balances. Does law require he inform us of details when we ask? Also, can investment funds be disbursed to the 3 children before the house is sold and those funds disbursed?
Thank you,
Marge Allen