MAY 17, 2010 VOLUME 17, NUMBER 16
What makes a trust a “spendthrift” trust, and what does it mean? A recent Florida Court of Appeal case gives a good snapshot of the significance and the effect of the categorization.
Elizabeth Miller wanted to leave her property to her two sons, but wanted to protect against her money being subjected to the claims of their creditors. This was particularly important to her because one son, James F. Miller, had already been sued over a business deal gone bad. In fact, there was a million dollar judgment on record and the plaintiffs were trying to collect from James.
Ms. Miller left James’s share of her estate in a trust with her other son, Jerry Miller, as trustee. The language of the trust authorized Jerry to give James any or all of the trust’s assets, but ordered that he not turn over anything to James’s creditors. Within weeks of making that change, Ms. Miller died and her estate passed partly to Jerry as trustee of James’s trust.
James’s creditors sued Jerry and the trust, claiming that James really exercised control over investments, distributions and trust decisions. The trial court agreed, and ruled that James had so much control over the trust and his brother that his interest in the trust had effectively “merged” into an ownership interest. The court’s order allowed James’s creditors to get to his inheritance.
Not so fast, said the Florida Court of Appeal. The appellate court agreed that James had effectively made trust decisions in place of Jerry, but noted that Jerry had the power to take back control at any time. It is the language of the trust itself and not the behavior of the trustee or the beneficiary that must control whether a spendthrift provision is effective, said the judges.
Had Ms. Miller’s trust given James the right to demand principal (or income) from the trust, that would have been a different matter. Because the decision to make those distributions ultimately rested with Jerry as trustee, James’s creditors could not reach behind the trust to gain access to the assets directly.
The appellate court agreed that “the facts in this case are perhaps the most egregious example of a trustee abdicating his responsibilities to manage and distribute trust property.” Nonetheless, the failure of the trustee to exercise control over the trust did not invalidate the spendthrift provision itself, and James’s creditors could not gain access to his inheritance. Miller v. Kresser, May 5, 2010.
Would Arizona courts have the same high regard for spendthrift provisions? Probably, if the trust’s property did not originally belong to the beneficiary. An individual can not create a spendthrift trust to protect his or her own property from creditors — though there are some exceptions. The most important exception under Arizona law is for trusts established for a beneficiary with a disability — so-called “special needs” trusts.