Protection From Self Settled Irrevocable Trust
A prospective client had established several years ago an irrevocable trust. The trust provided that all income be paid to the client, settlor, during his lifetime, and that upon his death the balance of trust property went to other named beneficiaries. The trust agreement had a spendthrift provision which says the settlor's income interest could not be assigned or attacked by his creditors. The prospective client thought that his interest was protected because the trust was irrevocable and because of the spendthrift agreement. I advised him that this trust would not protect him from creditors and that it would not survive a bankruptcy.
This trust is a "self settled trust" because the settlor established the trust for his own benefit during his lifetime. Florida courts have held that spendthrift protection set forth in self-settled trusts is invalid against creditors. The courts have found that public policy prohibits debtors from putting money in a trust and retaining a beneficial interest in the money. That the trust is irrevocable, or that the ultimate beneficiaries are people other than the settlor, does not solve the problem. A creditor or bankruptcy trustee could take the settlor's lifetime income interest. The income interest could be sold for its present value based on the settlor's age and the amount of monthly income.
One solution would be for the trustee of the trust to invest all the trust property in an annuity which pays current income. The trust distributions would represent proceeds of an annuity which proceeds are exempt from creditors under Florida statutes.
posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida
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I am not convinced that distributions from a trust would retain the exempt nature of the trust's receipts, even where all such receipts were exempt. The beneficiary of the annuity is the trust/trustee, not the grantor/beneficiary of the trust. While traceable assets can remain exempt, isn't that where the identity of the person with the benefit of the exemption remains the same? An alternative might be for the trustee to purchase an annuity naming the grantor as the direct beneficiary.
I have a question. My parents have an irrevocable trust. My father has died. My younger sister was the trustee for geographical reasons, but she has passed away too. I am the remaining daughter, now living near my mother. My sister's husband is the successor trustee and works in the field of wills, trusts and estates. I trust him, but he is also creeping up in age. Without asking him (as he works slow and steady, like the tortoise), I would like to know if I might be added now as a successor trustee to him, should anything happen to him. If so (and it must be possible), what is the best way to make this legal? Thanks for your comments. Valerie
My son was adopted in Texas when he was 10 years old by my husband (since divorced). My ex-husband (the adoptive parent) has set up an irrevocable trust in Florida, which
leaves a pittance of his estate to his adopted son, a much smaller amount than is being left to other natural born heirs.
I have been told that an ADOPTED child is entitled to an EQUAL share of their father's estate. Is this true if the legal adoption was in Texas and the irrevocable trust was set up in Florida?
If so, what steps can be taken to break the trust?
Thanks for any suggestions.
T. Travis (birth mother)
I have just found out that the attorney I used two years ago to creat a trust for my wife and I, had given us the wrong type of trust. We specifically requested asset protection from creditios and Medicaid, while activating the five year look back period for Medicaid. We were asked whether or not we wanted control over our assets, and naturally we said yes. But, the attorney never made us aware that the rovocable trust she was creating for us would not do what we requested other than remain in control of our assets.
Unfortunately we just found out the hard way that our creditors, due to a bad business loan, are now after our assets.
My question: Is there any kind of addendum that can be created, jointly with the revocable trust, which would cover our main concerns for future asset protection?