Miller v. Kresser, — So.3d —-, 2010 WL 1779899 (Fla. 4th DCA May 05, 2010)
Multigenerational spendthrift trusts – often referred to as “dynasty trusts” – are fast becoming the cornerstone of modern estate planning. This is not some esoteric issue of interest only to tax lawyers: it’s big business. A 2005 study I wrote about here estimated that these trusts attracted over $100 Billion in new assets over a relatively short period of time.
The fact that spendthrift trusts hold vast amounts of wealth and that there’s an ever growing number of them means lawyers of all stripes, be they divorce attorneys, bankruptcy attorneys, estate planners or probate litigators, will want to take notice of the 4th DCA’s opinion linked-to above. Why? Because it’s all about when and how a Florida court will let you crack one of these trusts open and yank out its assets.
4th DCA says trust agreement controls; bad facts irrelevant
A spendthrift trust works as an asset-protection shield because the trustee – not the beneficiary – controls the trust’s assets. But what if a creditor proves conclusively that this is not in fact the case? What if regardless of what the trust agreement may say, the actual facts on the ground demonstrate that the beneficiary is exercising complete “dominion and control” over his trust? Under those “bad facts” maybe a creditor should be permitted to pierce a spendthrift trust’s asset-protection shield? That, by the way, is one of the most common lines of attack against spendthrift trusts.
To my knowledge the linked-to opinion is the first Florida appellate decision – applying Florida’s new trust code provisions governing spendthrift trusts – to state in no uncertain terms that bad facts do NOT matter; the only thing that matters are the words on the page of the trust agreement. If the trust agreement has a valid spendthrift clause, end of discussion, creditor loses; the level of control a beneficiary exerts over his trust is simply irrelevant as a matter of law.
Here’s how the 4th DCA summarized the underlying facts and why the trial court allowed the creditor in this case to crack open the target spendthrift trust:
The trial court conducted a non-jury trial . . . at which the relevant issue was whether the spendthrift provision in the James Trust could be invalidated or pierced and the trust’s assets executed upon . . . In a written final judgment, the trial court found that the spendthrift provision in the James Trust was valid at the time the trust was settled.
The trial court then set forth a detailed account of James’s significant control over the James Trust and over Jerry, as trustee. The court found that Jerry had almost completely turned over management of the trust’s day-to-day operations to James. James controlled all important decisions concerning the trust assets, including investment decisions. Jerry never independently investigated these decisions to determine whether they were in the best interest of the trust, and some of the decisions have turned out to be unwise. The trial court concluded that Jerry simply rubber-stamped James’s decisions and “serve[d] as the legal veneer to disguise [James's] exclusive dominion and control of the Trust assets.”
Ultimately, the court held that James’s exclusive dominion and control over the James Trust served to terminate the trust’s spendthrift provision, allowing Kresser to reach all of the trust’s assets to satisfy his judgment.
And here’s why the 4th DCA said the trial court got it wrong:
While we agree that the facts in this case are perhaps the most egregious example of a trustee abdicating his responsibilities to manage and distribute trust property, the law requires that the focus must be on the terms of the trust and not the actions of the trustee or beneficiary. In this case, the trust terms granted Jerry, not James, the sole and exclusive authority to make distributions to James. The trust did not give James any authority whatsoever to manage or distribute trust property.
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To conclude otherwise would ignore the realities of the relationship between a beneficiary and trustee of a discretionary trust-the beneficiary always pining for distributions which he feels are rightfully his, and the trustee striving to allow only those distributions that coincide with the settlor’s express intent, as set forth in the trust documents. It is the settlor’s prerogative to choose the trustee she believes will best fulfill the conditions of the trust. In the case before us, it is not the role of the courts to evaluate how well the trustee is performing his duties. We are instead limited, by statute, to evaluating the express language of the trust to determine the extent of the beneficiary’s control and the extent to which a creditor may reach trust assets. It is the legislature’s function to carve out any exceptions to the protections afforded by discretionary and spendthrift trusts.
So what’s it all mean?
First, if you’re an estate planner, this case is good for your clients (and good for business): it underscores the rock solid asset-protection values of a Florida spendthrift trust. Second, if you’re a litigator defending a spendthrift trust against attack – this case is pure gold! Why? Because it should dramatically reduce the level of uncertainty and expense inherent to litigating this type of case. Rather than having to go through a full blown trial on the purely subjective question of how much beneficiary “dominion and control” is too much; now all you have to do is point to the trust agreement. If it has a valid spendthrift clause, game over, your client wins.
And last but not least, thanks to the excellent work done by counsel on both sides of this case we now have an exhaustive summary of Florida law – both for and against – the “dominion and control” argument for piercing a spendthrift trust.