Creditors’ Claims, Spendthrift and Discretionary Trusts
CREDITORS’ CLAIMS; SPENDTHRIFT
AND DISCRETIONARY TRUSTS
736.0501 Rights of beneficiary’s creditor or assignee.
736.0502 Spendthrift provision.
736.0503 Exceptions to spendthrift provision.
736.0504 Discretionary trusts; effect of standard.
736.0505 Creditors’ claims against settlor.
736.05053 Trustee’s duty to pay expenses and obligations of settlor’s estate.
736.05055 Notice of trust.
736.0506 Overdue distribution.
736.0507 Personal obligations of trustee.
736.0501 Rights of beneficiary’s creditor or assignee.—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.
736.0502 Spendthrift provision.—
(1) A spendthrift provision is valid only if the provision restrains both voluntary and involuntary transfer of a beneficiary’s interest. This subsection does not apply to any trust the terms of which are included in an instrument executed before the effective date of this code.
(2) A term of a trust providing that the interest of a beneficiary is held subject to a spendthrift trust, or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary’s interest.
(3) A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, 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.
(4) A valid spendthrift provision does not prevent the appointment of interests through the exercise of a power of appointment.
736.0503 Exceptions to spendthrift provision.—
(1) As used in this section, the term “child” includes any person for whom an order or judgment for child support has been entered in this or any other state.
(2) To the extent provided in subsection (3), a spendthrift provision is unenforceable against:
(a) A beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance.
(b) A judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust.
(c) A claim of this state or the United States to the extent a law of this state or a federal law so provides.
(3) Except as otherwise provided in this subsection and in s. 736.0504, a claimant against which a spendthrift provision may not be enforced may obtain from a court, or pursuant to the Uniform Interstate Family Support Act, an order attaching present or future distributions to or for the benefit of the beneficiary. The court may limit the award to such relief as is appropriate under the circumstances. Notwithstanding this subsection, the remedies provided in this subsection apply to a claim by a beneficiary’s child, spouse, former spouse, or a judgment creditor described in paragraph (2)(a) or paragraph (2)(b) only as a last resort upon an initial showing that traditional methods of enforcing the claim are insufficient.
736.0504 Discretionary trusts; effect of standard.—
(1) As used in this section, the term “discretionary distribution” means a distribution that is subject to the trustee’s discretion whether or not the discretion is expressed in the form of a standard of distribution and whether or not the trustee has abused the discretion.
(2) Whether or not a trust contains a spendthrift provision, if a trustee may make discretionary distributions to or for the benefit of a beneficiary, a creditor of the beneficiary, including a creditor as described in s. 736.0503(2), may not:
(a) Compel a distribution that is subject to the trustee’s discretion; or
(b) Attach 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.
(3) If the trustee’s discretion to make distributions for the trustee’s own benefit is limited by an ascertainable standard, a creditor may not reach or compel distribution of the beneficial interest except to the extent the interest would be subject to the creditor’s claim were the beneficiary not acting as trustee.
(4) This section does not limit the right of a beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard for distribution.
736.0505 Creditors’ claims against settlor.—
(1) Whether or not the terms of a trust contain a spendthrift provision, the following rules apply:
(a) The property of a revocable trust is subject to the claims of the settlor’s creditors during the settlor’s lifetime to the extent the property would not otherwise be exempt by law if owned directly by the settlor.
(b) With respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit. If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution.
(c) Notwithstanding the provisions of paragraph (b), the assets of an irrevocable trust may not be subject to the claims of an existing or subsequent creditor or assignee of the settlor, in whole or in part, solely because of the existence of a discretionary power granted to the trustee by the terms of the trust, or any other provision of law, to pay directly to the taxing authorities or to reimburse the settlor for any tax on trust income or principal which is payable by the settlor under the law imposing such tax.
(2) For purposes of this section:
(a) During the period the power may be exercised, the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power.
(b) Upon the lapse, release, or waiver of the power, the holder is treated as the settlor of the trust only to the extent the value of the property affected by the lapse, release, or waiver exceeds the greater of the amount specified in:
1. Section 2041(b)(2) or s. 2514(e); or
2. Section 2503(b) and, if the donor was married at the time of the transfer to which the power of withdrawal applies, twice the amount specified in s. 2503(b),
of the Internal Revenue Code of 1986, as amended.
(3) Subject to the provisions of s. 726.105, for purposes of this section, the assets in:
(a) A trust described in s. 2523(e) of the Internal Revenue Code of 1986, as amended, or a trust for which the election described in s. 2523(f) of the Internal Revenue Code of 1986, as amended, has been made; and
(b) Another trust, to the extent that the assets in the other trust are attributable to a trust described in paragraph (a),
shall, after the death of the settlor’s spouse, be deemed to have been contributed by the settlor’s spouse and not by the settlor.
736.05053 Trustee’s duty to pay expenses and obligations of settlor’s estate.—
(1) A trustee of a trust described in s. 733.707(3) shall pay to the personal representative of a settlor’s estate any amounts that the personal representative certifies in writing to the trustee are required to pay the expenses of the administration and obligations of the settlor’s estate. Payments made by a trustee, unless otherwise provided in the trust instrument, must be charged as expenses of the trust without a contribution from anyone. The interests of all beneficiaries of such a trust are subject to the provisions of this subsection; however, the payments must be made from assets, property, or the proceeds of the assets or property, other than assets proscribed in s. 733.707(3), that are included in the settlor’s gross estate for federal estate tax purposes.
(2) Unless a settlor provides by will, or designates in a trust described in s. 733.707(3) funds or property passing under the trust to be used as designated, the expenses of the administration and obligations of the settlor’s estate must be paid from the trust in the following order:
(a) Property of the residue of the trust remaining after all distributions that are to be satisfied by reference to a specific property or type of property, fund, or sum.
(b) Property that is not to be distributed from specified or identified property or a specified or identified item of property.
(c) Property that is to be distributed from specified or identified property or a specified or identified item of property.
(3) Trust distributions that are to be satisfied from specified or identified property must be classed as distributions to be satisfied from the general assets of the trust and not otherwise disposed of in the trust instrument on the failure or insufficiency of funds or property from which payment should be made, to the extent of the insufficiency. Trust distributions given for valuable consideration abate with other distributions of the same class only to the extent of the excess over the value of the consideration until all others of the same class are exhausted. Except as provided in this section, trust distributions abate equally and ratably and without preference or priority between real and personal property. When a specified or identified item of property that has been designated for distribution in the trust instrument or that is charged with a distribution is sold or taken by the trustee, other beneficiaries shall contribute according to their respective interests to the beneficiary whose property has been sold or taken. Before distribution, the trustee shall determine the amounts of the respective contributions and such amounts must be paid or withheld before distribution is made.
(4) The trustee shall pay the expenses of trust administration, including compensation of trustees and attorneys of the trustees, before and in preference to the expenses of the administration and obligations of the settlor’s estate.
(5) Nonresiduary trust dispositions shall abate pro rata with nonresiduary devises pursuant to the priorities specified in this section and s. 733.805, determined as if the beneficiaries of the will and trust, other than the estate or trust itself, were taking under a common instrument.
736.05055 Notice of trust.—
(1) Upon the death of a settlor of a trust described in s. 733.707(3), the trustee must file a notice of trust with the court of the county of the settlor’s domicile and the court having jurisdiction of the settlor’s estate.
(2) The notice of trust must contain the name of the settlor, the settlor’s date of death, the title of the trust, if any, the date of the trust, and the name and address of the trustee.
(3) If the settlor’s probate proceeding has been commenced, the clerk shall notify the trustee in writing of the date of the commencement of the probate proceeding and the file number.
(4) The clerk shall file and index the notice of trust in the same manner as a caveat unless there exists a probate proceeding for the settlor’s estate, in which case the notice of trust must be filed in the probate proceeding and the clerk shall send a copy to the personal representative.
(5) The clerk shall send a copy of any caveat filed regarding the settlor to the trustee, and the notice of trust to any caveator, unless there is a probate proceeding pending and the personal representative and the trustee are the same.
(6) Any proceeding affecting the expenses of the administration or obligations of the settlor’s estate prior to the trustee filing a notice of trust are binding on the trustee.
(7) The trustee’s failure to file the notice of trust does not affect the trustee’s obligation to pay expenses of administration and obligations of the settlor’s estate as provided in s. 733.607(2).
736.0506 Overdue distribution.—
(1) As used in this section, the term “mandatory distribution” means a distribution of income or principal the trustee is required to make to a beneficiary under the terms of the trust, including a distribution on termination of the trust. The term does not include a distribution subject to the exercise of the trustee’s discretion, even if:
(a) The discretion is expressed in the form of a standard of distribution; or
(b) The terms of the trust authorizing a distribution couple language of discretion with language of direction.
(2) A creditor or assignee of a beneficiary may reach a mandatory distribution of income or principal, including a distribution upon termination of the trust, if the trustee has not made the distribution to the beneficiary within a reasonable time after the designated distribution date, whether or not a trust contains a spendthrift provision.
736.0507 Personal obligations of trustee.—Except to the extent of the trustee’s interest in the trust other than as a trustee, trust property is not subject to personal obligations of the trustee, even if the trustee becomes insolvent or bankrupt.
Barry E. Haimo, Esq.
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