Spendthrift Trusts And Discretionary Trusts Discussed In Florida Bar Journal

There is an interesting asset protection related article in the  March edition of the Florida Bar Journal (that’s a professional magazine which the Florida Bar distributes to Florida attorneys). The article discussed and compared asset protection of spendthrift trusts and discretionary trust; most people don’t know theirs is a difference between the two trusts.

Most people are familiar with a spendthrift trust provision. A spendthrift provision states that a beneficiary my not voluntarily, or involuntarily, assign or pledge his future interest in trust assets or income. Most of my clients, and most attorneys, understand that a beneficiary’s interest in a spendthrift trust is protected from the beneficiary’s creditors, in and out of bankruptcy. Florida has a spendthrift trust statute (recently drafted in 2006) which defines a spendthrift trusts, tells us how to draft a spendthrift trust provision in a trust agreement, and provides that the beneficiary’s interest is an exempt asset.

  A discretionary trust provision gives the trustee the discretion to assign and/or distribute trust income to and among trust beneficiaries. There is another Florida statute dealing with a creditor’s right to attack a debtor’s beneficial interest in a discretionary trust. The statute says that a creditor cannot compel a trustee to make discretionary distributions to or for the debtor’s benefit, nor can the creditor attach the debtor’s right to receive future discretionary distributions.

There is potential confusion for two reasons. First of all, many estate planning trust contain both discretionary distribution provisions and a spendthrift clause. Second, the term “spendthrift trust” is better known and understood than “discretionary trust” so some people use the term spendthrift trust to refer to an “asset protected trust” generally without distinguishing discretionary trustee protections.

 A beneficiary’s trust interest is protected for either reason whether or not the beneficiary understands the technical distinction. There are reasons discussed in the Journal article why the difference may be importantly legally in some cases.