Spendthrift Clauses Can Protect Your Trust Benefits
As we know, creditors will do nearly anything to get their bills paid. Anything that you have, they will try to get. Yet, anything that you don’t have, but expect to receive later, they may try to get as well to satisfy outstanding debts or judgments.
A common scenario involves someone who is the beneficiary of a trust. If you are the beneficiary of a trust, you may not be entitled to use, spend, invest, or see a single nickel of money today (or any time in the near future). But at some point, according to trust documents, you will be entitled to the trust property or money. And just having that right is worth something.
Unless otherwise prohibited, any right to receive a benefit can be assigned. Generally, if you have a right to receive a payment from anybody some time in the future, you can sell that right to whomever you want. In fact, there are entire industries that purchase life insurance and personal injury settlements from people, providing money to them now, in return for the right to receive these proceeds in the future.
The problem is that generally, anything that can be assigned by you is an asset that can be taken by your creditors. That future right has a value, and your creditors can try to take that right to satisfy claims. That includes any rights to payments from a trust. If you have the right to assign or transfer anything you expect to receive in the future from a trust, your right to those proceeds is at risk to be taken from creditors.
This is where the spendthrift clause comes in. The spendthrift clause is written into Florida’s trust code, and is a provision that prohibits a beneficiary from selling or assigning their rights to a trust’s benefits. In principle, it’s supposed to avoid someone from selling off his future trust inheritance for pennies. But if written correctly, spendthrift provisions also will make trust benefits exempt from the claims of creditors.
Trusts must have specific spendthrift language in them, prohibiting voluntary and involuntary transfers of the trust property. And some claims, such as those for spousal or child support, or claims for taxes by government authorities, won’t be protected by the provision.
Remember that the provision only protects the future right to the trust property before it is actually in the possession of the beneficiary—once any property is actually distributed to someone, it is money or property like any other property, and loses its creditor protection. But Florida law does provide some protection, as a creditor of a beneficiary cannot compel a trustee to make a distribution to a beneficiary that would be discretionary just so the creditor can get to the property.
Make sure your trusts are up to date and protected from creditors. Contact Tampa business, asset and probate attorney David Toback to discuss a comprehensive probate and estate plan.