If you’re a family-law or trusts and estates lawyer, you can’t ignore the Berlinger case (which I dissect below). It’s that important.
In the absence of legislative changes or a conflicting ruling out of another Florida DCA, Berlinger is now the law of the land. Which means if you’re involved in litigation pitting an ex-spouse’s unpaid alimony claim against a Florida irrevocable discretionary trust, Bacardi v. White, 463 So.2d 218 (Fla.1985), is controlling; passage of Florida’s new trust code in 2006 changed nothing.
Big Picture
One of the chief selling points fueling the boom in multi-generational dynasty trusts is asset protection from creditor attack (including claims by ex-spouses). Why give your children $’s outright when the same $’s wrapped in a properly drafted irrevocable trust have the same buying power AND they’re shielded from almost all creditor attacks (see here, here).
The reason these trusts are impervious to most creditor attacks is usually a combination of two factors: the trust has a “spendthrift clause” that complies with F.S. 736.0502, and/or the trust qualifies as a “discretionary trust” under F.S. 736.0504. Most well-drafted trusts have both provisions — but they don’t have to. A creditor-protected spendthrift trust doesn’t have to be a discretionary trust, and vice versa. See Restatement (Second) of Trusts § 155, comment b.
Over three decades ago, in Bacardi v. White, 463 So.2d 218 (Fla. 1985), the Florida Supreme Court held on public policy grounds that under certain circumstances a Florida spendthrift/discretionary trust wasn’t shielded from child-support claims or an ex-spouse’s alimony claims. When Florida adopted its new trust code in 2006, it included separate statutes for spendthrift trusts (F.S. 736.0502) and discretionary trusts (F.S. 736.0504). With regard to spendthrift trusts, our new trust code explicitly codified the Bacardi rule for “exception creditors” in F.S. 736.0503. There wasn’t a comparable statute for discretionary trusts. This omission lead to some confusion, captured best in a Florida Bar Journal article entitled Bacardi on the Rocks by Miami attorney and asset-protection maven Barry A. Nelson:
In the author’s opinion, while it is clear that the Florida Supreme Court case of Bacardi v. White, 463 So. 2d 218 (Fla. 1985), was followed when the Florida Trust Code was enacted with respect to a spendthrift trust, it is unclear whether Bacardi was followed with respect to a Florida discretionary trust. One reading F.S. §736.0504 may reasonably believe that a spouse with a judgment resulting from divorce cannot reach or otherwise attach the interest of their former spouse in a discretionary trust created under Florida law. However, based upon the discussion below, the author believes Florida Statutes should be clarified to reflect whether Bacardi was intended to be followed when the Florida Trust Code was enacted in 2006 or whether Bacardi is on the “rocks” for a discretionary trust.
Case Study
Berlinger v. Casselberry, — So.3d —-, 2013 WL 6212023 (Fla. 2d DCA November 27, 2013):
In the linked-to case above Bruce Berlinger, the beneficiary of several large trusts, agreed to pay his ex-wife, Roberta Casselberry, $16,000 a month in permanent alimony. They had been married for 30 years. Their divorce was finalized in 2007. According to the 2d DCA, after the divorce:
Berlinger . . . enjoyed a substantial lifestyle sustained through payments made to Berlinger directly or on his behalf by the Berlinger Discretionary Trusts. The trusts paid for all of his living expenses including, but not limited to, mortgage payments, property taxes, insurance, utilities, food, groceries, and miscellaneous living expenses. . . .
Neither Berlinger nor his [current] wife were employed and neither of them intended to look for work. All of their expenses were paid by the trusts.
In 2011 Berlinger stopped paying his alimony. Did he have a good reason for not paying? Who knows. This I do know: you never want to be on the receiving end of this kind of quote from your appellate panel:
“Oh what a tangled web we weave when we first practice to deceive.” Although financially able to pay, Berlinger and his attorneys went to extraordinary lengths to avoid his support obligation to Casselberry.
Against this backdrop it shouldn’t come as a surprise that Berlinger got hammered on appeal; his key defense — that new F.S. 736.0504 overrides Bacardi as applied to discretionary trusts — went nowhere. According to the 2d DCA, if an ex-spouse was entitled to an ongoing writ of garnishment against a discretionary trust under Bacardi, new F.S. 736.0504 changes nothing.
Berlinger argues that section 736.0504 specifically prohibits Casselberry from attaching distributions made to or for Berlinger because the trusts are discretionary trusts and are afforded greater protection from creditors under the Florida Trust Code. We disagree. We conclude that the Florida Supreme Court’s decision in Bacardi v. White, 463 So.2d 218 (Fla.1985), is controlling. See also §§ 736.0503, 736.0504.
And here’s how the 2d DCA explained the rationale for its ruling as applied specifically to spendthrift trusts:
According to section 736.0504(2), a former spouse may not compel a distribution that is subject to the trustee’s discretion or attach or otherwise reach the interest, if any, which the beneficiary may have. The section does not expressly prohibit a former spouse from obtaining a writ of garnishment against discretionary disbursements made by a trustee exercising its discretion. As a result, it makes no difference that the instant trusts are discretionary. Casselberry is not seeking an order compelling a distribution that is subject to the trustee’s discretion or attaching the beneficiary’s interest. Instead, she obtained an order granting writs of garnishment against discretionary disbursements made by a trustee exercising its discretion.
Sections 736.0503 and 736.0504 codify the Florida Supreme Court’s holding in Bacardi. Neither section protects a discretionary trust from garnishment by a former spouse with a valid order of support. The order in this case complied with the Bacardi decision and sections 736.0503 and 763.0504 of the Florida Trust Code.
So what now?
If you’re an estate planner, and your client is really worried about sheltering the trusts he’s creating for his children from divorce-related claims, how you react to Berlinger depends on whether the divorce threat is prospective or preexisting.
If your client has children who are NOT already involved in a divorce, or who are NOT already subject to claims for unpaid alimony, the threat is prospective. The best way to deal with the threat of future divorce claims against trust assets is to address the problem head. How? Prenups. One way parents can incentivize their children to execute prenups sheltering family dynasty trusts is incorporating the incentives directly into the trust agreement. If a trust beneficiary is going to get married, or inherits trust assets while married, the trust can be designed to cut off most — if not all — financial support until the beneficiary and his or her spouse execute a marital agreement sheltering trust assets from all divorce-related claims, including alimony. For an excellent example of how to draft this kind of clause you’ll want to read Drafting for Flexibility in Dynasty Trusts by Bruce Stone of Coral Gables, Florida. Bruce is one of the best drafters in practice today.
If your client has children who ARE already involved in a divorce, or who ARE already subject to claims for unpaid alimony, the threat is preexisting. These cases are a lot tougher to plan for, and it’s these clients that most concern commentators like Barry Nelson. Here’s an example of the type of planning scenario Barry wants us to think about, as discussed in his Florida Bar Journal article, Bacardi on the Rocks:
Divorced son Mark, a Florida domiciliary, who has a large support obligation to a former spouse, was a successful Florida residential homebuilder. As a result of the existing market downturn, Mark no longer has a source of income. Mark used all of his assets to satisfy bank guarantees on land that he stockpiled for future development. The land lost significant value, and Mark settled with his mortgage lender by using all of his liquidity in exchange for a release. Mark’s father, Jack, a wealthy and elderly retiree, consults his adviser and asks whether the testamentary trust for Mark included in his existing estate plan could be reached by Mark’s former wife who, as a result of Mark’s inability to satisfy his unpaid alimony obligation to her, received a judgment against Mark in the form of support. Jack states that when Mark was financially secure, Mark was making timely payments to his former wife. However, like many others, Mark’s ability to satisfy his debts was significantly curtailed when the value of his real estate vanished along with his capacity to earn a living as a developer. Jack is helping to support Mark (hopefully temporarily) and wants the comfort that upon Jack’s death, Mark, and not Mark’s former wife, would benefit from assets left in a discretionary trust for Mark.
For this kind of client, shopping around for a trust jurisdiction marketing itself as being especially un-friendly to ex-spouses might make sense. That’s Barry Nelson’s ultimate take-away in Update: Are Trust Funds Safe From Claims For Alimony or Child Support?:
Based upon Berlinger, parents desiring maximum protection for their children should consider creating and administering discretionary trusts in Alaska, Nevada or South Dakota, rather than Florida.
But not everyone thinks leaving Florida is such a good idea. Jonathan Gopman, Jeff Baskies, David Ruben and Evan Kaufman, all of them well-respected estate planning attorneys, recently published a piece on LISI entitled Berlinger v. Casselberry: Why the Decision Was Wrong and Florida May Not Be a Bad Trust Jurisdiction for Discretionary Trusts. Their conclusion? Take a deep breath, don’t panic, and don’t do anything rash. Here’s an excerpt:
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 beneficiary’s interest in a trust.
We disagree with the recommendation that drafters of Florida trusts should consider migrating them to Alaska, Delaware, Nevada or South Dakota. We feel it is perhaps premature to rush out of Florida unless of course, you are the trustee of a discretionary trust with a beneficiary with an exception creditor issue who could use the Berlinger case against you in the near future.
Instead, we urge caution and suggest taking a bit more time before reacting (over-reacting) to the Berlinger decision. There is still hope that the case will be resolved correctly, and if not, that a legislative change will soon follow. If our reading of the legislative history and the Florida Trust Code is correct, then Florida already took strides toward making its trust law palatable to planners, and if the legislature has to adopt even more explicit language to effect that result, then doing so should only make using Florida Trusts even better.