Laws governing trusts are not static and changes often have far reaching impact on trust beneficiaries, trustees, and creditors of trust beneficiaries seeking to collect a beneficiary’s obligation from a trust. As the recent case ofBerlinger v. Casselberry, 133 So. 3d 961 (Fla. 2d DCA 2013) demonstrates, it may not be easy to anticipate the impact of a particular legal change. Often legal changes are evolving ones that must be tested in the courts or clarified by the legislature before the full impact is understood.
Certain trusts attempt to afford a beneficiary protection from the beneficiary’s creditors. However, those protections are not unlimited and they differ from state to state. In Florida, assets in “spendthrift trusts,” those that prevent a person (often unable to control his or her spending) from conveying his or her interest in the trust, are generally protected from creditors. Exceptions to the general protections exist for the beneficiary’s child, spouse or former spouse with a judgment or court order against the beneficiary for support or maintenance, a judgment creditor who provided services for the protection of the beneficiary’s interest in the trust and claims of this state or the United States to the extent a law of this state or a federal law so provides. Those creditors, often referred to as “exception creditors,” can obtain an order of garnishment requiring that distributions from the trust be paid to the creditor rather than the beneficiary until a debt is satisfied. If the spendthrift trust is one requiring mandatory distributions at certain times, overdue mandatory distributions may also be subject to garnishment by a creditor.
Distributions from a spendthrift trust may also be discretionary rather than mandatory, giving the trustee the full authority to make decisions in the trustee’s sole discretion as to distribution of trust funds to or for the beneficiary’s benefit. Whether a creditor can garnish distributions from a discretionary spendthrift trust in Florida has been the subject of much debate, and the decision in Berlinger has opened the doors to further debate on the issue.
Those on one side of the Berlinger debate assert that a discretionary trust should remain protected from all creditors, even exception creditors as defined above. This side narrowly construes the case of Bacardi v. White, 463 So. 2d 218 (Fla. 1985), which recognized a Florida spendthrift/discretionary trust was not shielded from child support or alimony claims. These narrow constructionists argue that the Florida Trust Code, adopted after Bacardi,rejected that part of the Bacardi decision recognizing that exception creditors could garnish a spendthrift trust regardless of whether it was also a discretionary trust.
The Court in Berlinger interpreted the Florida Trust Code differently. It found that while a spouse with a support judgment could not compel a distribution from a discretionary spendthrift trust, it could obtain a court order of garnishment attaching to distributions to the beneficiary. In other words, the exception creditor could not force a distribution but could attach (e.g., garnish) the distribution BEFORE the funds were given to the beneficiary or applied for the beneficiary’s benefit.
Disagreement regarding the Berlinger decision continues and will ultimately be determined through subsequent court decisions or legislation clarifying whether, in Florida, discretionary trusts (and discretionary spendthrift trusts) are granted greater protection than spendthrift trusts.
Courts that address this issue in the future may decide that the Berlinger case should be limited to its specific and egregious facts. As the Court determined that Mr. Berlinger and his new wife were living a lavish lifestyle from various spendthrift discretionary trusts, hiding property within those trusts, and refusing to pay court awarded support obligations, it may have been public policy that necessitated the garnishment. On the other hand, future courts could decide that the Berlinger case should apply to allow all creditors, not just a former spouse or other exception creditors, to garnish distributions from a discretionary trust. This latter result appears unlikely, but it cannot be ruled out.
A resolution of the issue raised by Berlinger is on the horizon, but in the meantime the answer to whether a discretionary trust can be garnished continues to be “maybe”.