In Berlinger v. Casselberry, Case No. 2D12-6470, 6 (Fla. 2d DCA Nov. 27, 2013), the Florida Second District Court of Appeal upheld a writ of garnishment issued by a trial court against the trustee of a discretionary trust over any present and future distributions made to or for the benefit of a trust beneficiary. The holding is unique as it is the first case to interpret the Florida Trust Code spendthrift/discretionary trust provisions (since the Florida Trust Code became effective on July 1, 2007), and the first case to hold the well-known Bacardi v. White decision [463 So.2d 218 (1985)] is still applicable to Florida trusts (both those protected by spendthrift clauses and those that are wholly discretionary).
Bruce Berlinger (Bruce) and Roberta Casselberry (Roberta) divorced in 2007. In accordance with a marital settlement agreement that was incorporated into a final judgment of dissolution of marriage, Bruce agreed to pay Roberta $16,000 per month in alimony. Thereafter, Bruce subsisted exclusively on distributions made from several third party trusts (collectively, the Trusts) in the discretion of the trustee of the trusts (the Trustee). Although Bruce continued to live on the distributions from the Trusts, he stopped paying alimony in May of 2011. On July 21, 2011, Bruce conveyed interests in certain real property into an irrevocable life insurance trust (the ILIT) that was not previously disclosed to Roberta. Roberta was unaware of these transfers. The deed stated that Bruce was the sole holder of the beneficial interest in the ILIT.
Roberta filed a motion to enforce payment of the alimony in arrears and for contempt. Thereafter, Bruce and Roberta reached a settlement in which Bruce agreed to satisfy his delinquent alimony obligations. However, after the settlement, $32,625.54 plus interest remained owing to Roberta. The trial court then issued writs of garnishment to the trustee of the Trusts.
The writs provided that all distributions made directly or indirectly to, on behalf of, or for the benefit of Bruce by the trustee of any trusts to which Bruce was a beneficiary would instead be made payable to Roberta unless at the time of distributions there was no past due alimony payments owed to Roberta. Furthermore, the garnishment order provided that should a trustee desire to make distributions to Bruce beyond the amount of the then outstanding alimony obligation, the trustee was required to seek court approval before making any such distribution to ensure that there remained sufficient assets in the trust to secure the continued payment of alimony. Bruce appealed the trial court’s order issuing the continuing writs of garnishment against the Trustee. However, the appellate court affirmed the trial court's ruling.
As a result of the Berlinger case, there are several important issues for clients who have or who are creating discretionary trusts in Florida to consider. The individual and corporate fiduciaries appointed to serve as trustees of such discretionary trusts should also consider these issues carefully. These issues include, but are not limited to, the following:
- Wholly discretionary distributions might be subject to garnishment by a former spouse (and by other exception creditors) of a trust beneficiary.
- The decision has the potential to do serious harm to both the beneficiaries of Florida trusts and to the trust industry in Florida. The effect of the decision on a trustee's fiduciary duties may discourage estate planning practitioners and trustees from recommending clients establish trusts in Florida.
- If a trustee is concerned that a trust beneficiary has specific outstanding creditor issues (often extremely difficult for fiduciary to ascertain) such as court-ordered alimony or unpaid tax liabilities, the Berlinger decision may require immediate action by the trustee to protect the beneficiary's interests. Otherwise, it appears clients can (and perhaps should) wait for the final resolution of the Berlinger case to decide whether to take additional steps to further protect trust beneficiaries.
- Practitioners who continue draft discretionary trust agreements governed by Florida law should strongly consider including provisions that address the issues raised by the Berlingerdecision.
The court was wrong in Berlinger, that is, the court misapplied the Bacardi holding to a discretionary trust while ignoring the patent statutory distinctions between spendthrift trusts and discretionary trusts adopted in 2006 in the new Florida Trust Code.
Florida provides a creditor with the remedies of attachment and garnishment in Chapters 76 and 77 of the Florida Statutes. Florida Statutes §76.01 provides a judgment creditor with a right of “attachment at law against the goods and chattels, lands, and tenements of his or her debtor.” Attachment is a remedy that gives a creditor a right to seize the property of the debtor in such debtor’s possession. Additionally, Florida Statutes § 77.01 provides that any creditor with a judgment has the right to garnish “any tangible or intangible personal property of defendant in the possession or control of a third person” (i.e., in this case, in the possession or control of the Trustee of the Trusts). A garnishment order provides a creditor with the right to seize the property of his, her or its debtor in the possession of a third party.
Through a series of statutes (see Part V of the Florida Trust Code Florida Statutes §§ 736.0501–736.0507), Florida law addresses whether a judgment creditor can enforce its rights against the interest of a beneficiary of a trust. For instance, Florida Statutes § 736.0501 provides that:
Except as provided in s. 736.0504, to the extent a beneficiary’s interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary’s interest by attachment of present or future distributions to or for the benefit of the beneficiary or by other means. The court may limit the award to such relief as is appropriate under the circumstances. (Emphasis added.)
The key issue that seems to have been disregarded by the court in Berlinger is the statutory construction in Part V of the Florida Trust Code distinguishing “spendthrift trusts” from “discretionary trusts” as it relates to the claims of creditors of a beneficiary. As will be explained in detail below, it is essential to understand that as to a “spendthrift trust” – i.e., a trust with a mandatory payout to a beneficiary (e.g., “pay all of the income of the trust at least annually to the beneficiary”) protected “only” by a spendthrift clause - the Florida Trust Code (Florida Statutes §§ 736.0501-.0503) specifically and clearly adopted the existing Florida public policy as expressed in the Bacardi case. Thus, as to “spendthrift trusts” (mandatory trusts with spendthrift clauses), the Florida legislature in adopting the Florida Trust Code weighed and balanced the competing public policies, and adopted the approach in Bacardi that as to most creditors spendthrift clauses are to be respected (Florida Statutes §736.0502), however, pursuant to Florida Statutes §736.0503, there are certain exception creditors (e.g., children or spouses for support) who should be able to reach the beneficiary’s mandatory distributions from a trust (i.e., the beneficiary’s property). However, the Florida Trust Code then set out totally separate rules for “discretionary trusts” (i.e., those where distributions are in the discretion of the trustee) and directed that regardless of having spendthrift clauses or not, discretionary trusts should be treated differently as to creditors of a beneficiary (the Florida legislature even pulled out those rules and included the rules in a separate statute – Florida Statutes, § 736.0504) which does not allow for exception creditors and specifically says the provisions relating to exception creditors (Florida Statutes §736.0503) do not apply.
As to spendthrift trusts, Florida Statutes § 736.0502 provides in relevant part that in a trust containing both mandatory distributions to a beneficiary (thus not a discretionary trust as described in detail below) and a spendthrift provision, “except as otherwise provided in this part...a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before receipt of the interest or distribution by the beneficiary.” A spendthrift provision prohibits a beneficiary from transferring his or her right to distributions and prevents a creditor of a beneficiary from attaching the beneficiary's interest prior to actual receipt of a distribution from the trust. In jurisdictions that recognize a spendthrift provision, including Florida, such a provision will prevent creditors from reaching a beneficiary’s interest in a trust with mandatory payments prior to the beneficiary’s actual receipt.
Florida law also recognizes several statutory exceptions to the enforceability of a spendthrift provision. Florida Statutes § 736.0503 provides that a spendthrift provision cannot be enforced against certain classes of creditors (known as "exception creditors"), including a beneficiary’s child, spouse or former spouse if such person has a court order for support or maintenance. The other exceptions creditors include a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust, the state of Florida to the extent Florida law so provides and the United States to the extent federal law so provides (which includes so-called “super creditors” such as the Internal Revenue Service and/or other federal agencies). Florida Statutes § 736.0503(3) allows exception creditors to obtain a court order attaching present or future distributions to or for the benefit of the beneficiary.
However, the legislature provided that avoiding spendthrift clauses should be the exception not the norm (under Florida law), specifically providing in Florida Statutes § 736.0503(3) that the ability of exception creditors (a beneficiary’s child, spouse, former spouse, or a judgment creditor who has provided services for the protection of a beneficiary’s interest in a trust) to pierce spendthrift trusts should apply “only as a last resort upon an initial showing that traditional methods of enforcing the claim are insufficient.” (Emphasis added.)
Notwithstanding the right granted to exception creditors under Florida Statutes § 736.0503(3), Florida Statutes § 736.0504 provides that a creditor of a beneficiary of a discretionary trust,regardless of whether it includes a spendthrift provision, may not compel a distribution or “[a]ttach 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.” It seems logical that Florida Statutes § 736.0504 would prohibit the creditor of a discretionary beneficiary from attaching or otherwise reaching such beneficiary’s interest because the beneficiary only has an expectancy or a mere possibility of receiving a distribution and no enforceable right to such distribution.
A close examination of this part of the Florida Trust Code (that is, Florida Statutes §§ 736.0503(3) and 736.0504(2)) strongly suggests a limited application of Florida Statutes § 736.0503(3). Florida Statutes § 736.0504(2) prohibits the creditor of a discretionary beneficiary from attaching or otherwise reaching the beneficiary’s interest, yet Florida Statutes § 736.0503(3) allows exception creditors to obtain a court order attaching present or future distributions to or for the beneficiary “[e]xcept as otherwise provide in...s. 736.0504.” To read Florida Statutes § 736.0503(3) in pari materia with Florida Statutes § 736.0504(2), it seems more logical to conclude that Florida Statutes § 736.0503(3) should only apply to mandatorydistributions and other mandatory rights. In other words, Florida Statutes § 736.0503(3) should allow exception creditors to attach only mandatory distributions to or for the benefit of the beneficiary – and thus to pierce trusts which rely on a spendthrift trust for protection as opposed to those that are discretionary. This seems most logical since attachment applies to a beneficiary or debtor's property interests and a discretionary interest in a trust should not be construed as a property interest.
Furthermore, the foregoing analysis relating to Florida Statutes §§ 736.0503(3) and 736.0504(2) is supported by legislative history. The House of Representatives staff analysis of the 2007 amendments to Florida Statutes §§ 736.0501–736.0504 indicates that a purpose of the bill was to provide that “the exceptions to a spendthrift provision in a trust do not overridethe provisions relating to discretionary trusts in s. 736.0504, F.S.” and “the protections given to the discretionary interest of a trustee outrank the interest of a creditor.” The analysis of the changes to Florida Statutes § 736.0501, which generally addresses the rights of a beneficiary’s creditor to reach the beneficiary’s interest, provides that “[t]he rights given to creditors under the section are limited to those cases where a beneficiary has a right to distributions [and if] distributions are discretionary a beneficiary has no ‘attachable’ trust interest.” This analysis supports the interpretation that the remedies provided to exception creditors in § 736.0503(3) only apply to a mandatory interest protected by a spendthrift clause.
Nevertheless, in analyzing Roberta’s right to garnish Bruce’s potential interest as a discretionary beneficiary, the court appears to misinterpret Florida Statutes §736.0504(2) and bases its decision on Bacardi v White, 463 So. 2d 218 (1985).
While noting that the creditor remedies provided in Florida Statutes § 736.0503(3) are subject to the exception found in Florida Statute § 736.0504(2), the court nevertheless concludes that Florida Statutes § 736.0504(2) “does not expressly prohibit a former spouse [a creditor] from obtaining a writ of garnishment against discretionary disbursements made by a trustee exercising its discretion.” In its analysis the court determined that while Florida Statutes § 736.0504(2) prohibits a court order against a discretionary trustee either compelling a distribution or attaching the beneficiary’s interest, it would not prohibit a court order granting a writ of garnishment against discretionary distributions made by the trustee. Thus, the court’s holding provides a writ of garnishment may attach to the beneficiary’s interests in a trust, like a charging order applies in the context of a debtor’s interest in a limited partnership or limited liability company.
However, the court appears to ignore the fact that a garnishment appears to be a subset of attachment when a third party holds or has possession of a debtor's property, and thus requires an underlying property interest to be enforceable – which is lacking in the context of a purely discretionary trust.
Nevertheless, the court gave great weight to the holding in Bacardi. In Bacardi, a husband and wife divorced and the husband was obligated pursuant to the dissolution of marriage judgment to pay the wife $2,000 per month in alimony until the earlier of the wife's death or her remarriage. Thereafter, the husband stopped paying alimony and the wife obtained three judgments against him. The wife served a writ of garnishment on the trustee of a spendthrift trust created by the husband’s father for the benefit of the husband. Additionally, the wife obtained a continuing writ of garnishment against the trust income for future alimony payments. While the Third District Court of Appeals ruled that income from the trust was exempt from garnishment to satisfy court-ordered alimony, the Supreme Court of Florida quashed the decision and held that disbursements from spendthrift trusts are subject to garnishment when traditional remedies to enforce alimony obligations are not effective. Additionally, although really in dicta, the Supreme Court ruled that any discretionary distributions were subject to the writ of garnishment.
Based upon the differences in Florida Trust law from 1985 (when Bacardi was decided) to 2013 (when Berlinger was decided), the Berlinger court’s reliance on Bacardi appears to have been inappropriate.
First, the Bacardi decision predates the existence of the Florida Trust Code (including Florida Statutes §§ 736.0501–736.0504) by more than twenty (20) years. While the Bacardi decision discusses at length the competing public policy of enforcing spendthrift provisions versus the enforcement of alimony and child support orders, it is important to note that this was an unsettled issue at the time. These competing public policies were also the subject of great controversy when the current version of the Uniform Trust Code (UTC) was originally promulgated. The original version of § 504 in the UTC appeared to have created exception creditors for not only spendthrift trusts but also discretionary trusts. In response to the controversy, many states chose to modify this provision or in some cases repeal the UTC altogether.
Second, the court in Berlinger ignored how the Florida legislature modified Florida’s version of Section 504 of the UTC, Florida Statutes § 736.0504, in a number of ways. First, Florida Statutes § 736.0504 removes the exception for certain creditors. Section 504(b) of the UTC prohibits a creditor of a discretionary beneficiary from compelling a distribution, however, subject to the exceptions provided in paragraph (c) of Section 504 (which gives the court the power to compel or direct discretionary distributions to certain exception creditors if a trustee “has not complied with a standard of distribution or has abused a discretion.”). Florida Statutes § 736.0504(2) not only removes the precatory phrase “[e]xcept as otherwise provided in subsection . . .” but also adds the phrase “including a creditor as described in s. 736.0503(2)” in an apparent attempt to clarify that the prohibited creditor actions are not subject to exceptions.
Additionally, Florida Statutes §736.0504(2) adds to the list of prohibited creditor actions (that are not, as discussed immediately above, subject to an exception). Section 504(b) of the UTC only includes “compel a distribution” in the list of creditor actions that are prohibited (subject to the exceptions); however, Florida Statutes § 736.0504(2) adds “[a]ttach 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” in an obvious attempt to clarify that a creditor’s attempt to attach or otherwise reach a beneficiary’s interest is not only prohibited but also not subject to an exception. Thus, the Florida legislature appears to have addressed, subsequent to the Bacardi decision, the competing public policies at issue inBacardi in the form of Florida Statute §§ 736.0503(3) and 736.0504(2) - and it chose to treat the issue of exception creditors differently for spendthrift trusts (trusts with mandatory distributions and spendthrift clauses) and discretionary trusts (trusts where distributions are not mandated but are solely made in the trustee’s discretion).
Berlinger should be overturned on rehearing or appeal or the Florida Bar and legislature should act to repeal the holding.
If permitted to stand, the court’s decision in Berlinger not only appears to violate the express terms of the Florida Trust Code and the legislative history surrounding its passage, it also appears to create an awkward public policy conundrum. Discussions with any corporate trustee would immediately identify the problem. If Berlinger stands, the trustee of the trust (a discretionary trust) cannot make a distribution for the benefit of the beneficiary (in this case, Bruce, but it also cannot make a distribution to the spouse (or other exception creditor) holding the support order (in this case, Roberta) because making such distribution would be a clear violation of the trustee's fiduciary duties. Thus, if Berlinger stands, any trustee of a discretionary trust against whom a writ of garnishment is issued would be forced to make no distributions to anyone - perpetually. A public policy that potentially creates two paupers (or wards of the state) rather than one is a poor policy.
Furthermore, while a spouse or ex-spouse of a beneficiary can qualify as an exception creditor under Florida Statutes §736.0503, the statute also provides for three other classes of exception creditors. As previously mentioned, these exception creditors include a beneficiary’s child with a court order for support, a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust and the State of Florida or the United States to the extent permitted by law. At least in the case of three of these four additional exception creditors it may be difficult to conclude that the same public policy concerns exist to protect the interests of those creditors. Nonetheless, the holding in Berlinger would provide support for those creditors garnishing the purely discretionary interest of a beneficiary in a discretionary trust. This appears to establish a poor public policy.
Additionally, the Berlinger court focusing on one particular case fails to consider the inherent difficulties a trustee in Florida will encounter administering a discretionary trust because of this decision. If a trustee is aware of the possibility that a beneficiary's interest may be garnished in the future, the trustee certainly has a fiduciary duty to take action to protect the beneficiary's interest. Rather confusing and problematic, however, will be determining when the trustee has a duty to take such action. For instance, should every trustee of a discretionary trust governed by Florida law and/or administered in Florida immediately considering taking action by moving or transfer the situs of such trust to a more protective jurisdiction and change the governing law of the trust to such other jurisdiction? Should a trustee act when it learns that a beneficiary is in the process of getting married, is having marital difficulties, considering a divorce or is experiencing severe financial or personal difficulties? Would the answer to this question change if the exception creditor is the State of Florida or the United States government? Anyone can experience problems with the Internal Revenue Service. Certainly it seems odd to adopt a public policy that promotes trusts (or legitimate commerce) fleeing the state, and steps in such direction should fail for a number of reasons.
The decision has the potential of discouraging estate planning practitioners and trustees from recommending clients establish trusts in Florida. Arguably, a trustee of an existing trust has a fiduciary duty to transfer the situs of the trust to another jurisdiction and change the governing law. It is not difficult to envision the entire estate planning community recommending that our clients establish their trusts in more protective jurisdictions and move existing trusts to those jurisdictions.
Practitioners who continue to draft discretionary trust agreements that will be governed by Florida law should strongly consider including certain provisions in their trust agreements to provide sufficient flexibility to a trustee to address the concerns created by the Berlingerdecision. Such provisions could, for example:
- Give a trustee the power to move a trust to another jurisdiction and change the governing law of the trust.
- Give a trustee the power to make decanting distributions from the trust to another trust governed by the law of a more protective state.
- Grant a person a limited power of appointment that would allow the holder of the power to appoint trust assets to another more protective trust.
- Include a class of beneficiaries of a discretionary trust rather than provide for a single beneficiary. If the trustee is unable to make a distribution to a beneficiary because of a garnishment order, distributions could still be made to the other beneficiaries. Such additional beneficiaries might include a qualified spouse of the debtor beneficiary (that is, an individual who is married to and living with the debtor-beneficiary at a particular time) or siblings of the debtor-beneficiary. A qualified spouse could receive distributions to pay for personal expenses that indirectly benefit the beneficiary. Similarly a beneficiary’s siblings could receive distributions and use their annual exclusions to transfer the funds to benefit the debtor-beneficiary.
- Grant a trustee or third party the power to add individuals and other trusts to the class of beneficiaries eligible to receive distributions to provide the same flexibility described in item 4.
- Appoint an independent trustee or individual to control the foregoing powers.
The defendant in Berlinger filed a motion for rehearing in the Florida Second District Court of Appeals. If the motion for rehearing is granted the court will have an opportunity to revisit the case and hopefully overturn a poor decision. Should the Berlinger decision stand, it has the potential to do serious harm to both the beneficiaries of Florida trusts and to the trust industry in Florida.
If the Berlinger decision stands hopefully the Florida legislature will quickly act to enact legislation addressing this serious problem.
As further developments with respect to the Berlinger holding should be on the horizon (either by rehearing or legislative action), unless a trustee is concerned about a significant pending situation that requires immediate attention, it appears clients can (and perhaps should) wait for the final resolution of the Berlinger case to decide whether to take additional steps to further protect a beneficiary's interest in a trust.