“My problem lies in reconciling my gross habits with my net income.” ~ Errol Flynn
A trust is a fiduciary arrangement that allows a third party (“Trustee”) to hold assets on behalf of a beneficiary or multiple beneficiaries. Trusts can be written in many ways and can specify exactly how and when the assets pass to the beneficiaries. Trusts provide several benefits, including avoidance of probate and minimization of estate and generation-skipping transfer taxes, but perhaps one of the most important functions trusts serve is to protect beneficiaries from their own improvident spending habits and from creditors. One of the most common provisions in a trust document is a “spendthrift” provision. Everyone knows a spendthrift – someone who, like Errol Flynn, spends more money than he or she has – but a Settlor (the person creating the trust) can add provisions to the trust document that protect a beneficiary from reckless spending. “Spendthrift Trusts are created with the intention of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection.” Miller v. Kresser, 34 So.3d 172 (Fla. 4th DCA 2010). The Miller court noted that “a valid spendthrift provision prevents a beneficiary from transferring his or her interest in the trust as well as prevents creditors or assignees of the beneficiary from reaching any of he trust funds until they are dispersed to the beneficiary.” Id.
A recent decision by the Fifth District Court of Appeals illustrates the protection provided by a spendthrift provision. In the recently-decided Zlatkiss v. All America Team Concepts, LLC, 38 Fla. L. Weekly D1194 (Fla. 5th DCA June 7, 2013), Robert and Linda Zlatkiss made a $350,000 loan to Louis Steinmetz, who signed a personal guarantee on the representation that he was the beneficiary of a $6,850,000 trust, which was true. Steinmetz defaulted on the loan and the Zlatkisses sued Steinmetz and Wells Fargo (the trustee); however, it turned out that Steinmetz’s trust is a spendthrift trust, which prevents the trustee from making distributions if the distributions would be available to creditors. “When Steinmetz failed to repay the loan, trustee Wells Fargo refused to make trust distributions to cover the debt owed to the Zlatkisses.” Id. The court noted that “spendthrift provisions have long been recognized as valid in Florida” and Florida Statutes 736.0501-.0507 provide for the enforcement of spendthrift trusts. Id. Thus, the Zlatkisses were unsuccessful in their attempt to have the trust repay Steinmetz’s debt to them. The end of the Zlatkiss-Steinmetz story sounds patently unfair, but Mr. Steinmetz is going to find himself in the frustrating position of being the beneficiary of a multimillion dollar trust that will not distribute any money to him as long as the judgment validly exists. So, the Zlatkisses can get a judgment against Steinmetz and as long as that judgment is out there Wells Fargo will not make any distribution to Mr. Steinmetz because once it does that distribution can be attached by the Zlatkisses. The only ones who win are Wells Fargo (because it continues to serve as trustee and to collect trustee’s fees) and Wells Fargo’s attorneys (because they get paid by the trust).
There are many morals to this story: 1) if you are loaning money to someone who claims an interest in a trust, ask an attorney to read the trust first to make sure the funds in it are available to satisfy the loan in the event of a default; 2) if you have assets and are leaving them to beneficiaries, consider putting them in a trust with spendthrift provisions to protect those beneficiaries from themselves; 3) if you are a trustee and dealing with a spendthrift beneficiary, be very careful about the distributions made to that beneficiary so that the terms of the trust are not violated; and 4) if you are the beneficiary of a spendthrift trust and think you can borrow with abandon because no one can get at your trust money, think again because the trustee – in order to comply with the terms of the trust – may have to shut off your spigot, too.
If you have a question about a spendthrift trust, please call the attorneys at Adrian Philip Thomas, P.A. for a free consultation.