Yes A Spendthrift Provisions Can Protect Against Civil Judgments
What is a Spendthrift Provision? One of the best forms of asset protection we can provide is through a trust that contains a spendthrift provision. In a revocable trust, a spendthrift provision has some significant benefits such as protection against your beneficiaries’ creditors.
So what exactly does a spendthrift provision do? A spendthrift provision is a provision within a revocable or irrevocable trust that limits the beneficiary’s access to trust. This restriction protects the trust property in two ways, it prevents a beneficiary from selling his or her interest in the trust property as a beneficiary, and it prevents the beneficiary’s creditors from compelling the trustee to make distributions except where this would void public policy like in the case of alimony, child support and some civil judgements.
A grantor will create a trust with a spendthrift provision to protect the trust for the beneficiaries as well as future beneficiaries. A trust with a spendthrift provision will often be set up as a discretionary trust. This means that a trustee, which a person or entity that acts as the manager of the trust has total discretion on how and when to make distributions to the beneficiaries of the trust.
A spendthrift provision means that a beneficiary’s creditors cannot compel the trustee to make a distribution to satisfy a debt. So for instance, Creditor X demands that Beneficiary A use the money to pay his debt of $10,000. Even if the beneficiary cannot pay off his debt, Creditor X cannot compel the trust to pay a debt directly to Creditor X if the trust is discretionary. However, once the trustee has a made a distribution to a beneficiary the creditor may then take the distributed assets from the individual beneficiary.
There are some debts that courts do not allow spendthrift provisions to protect due to public policy concerns. For instance, a spendthrift provision will not apply to claims for alimony, child support, and back taxes. For various reasons, courts favor these debts because it is public policy to keep families from relying on support from the state when there are other resources that could provide support. Child support, for instance, shouldn’t be withheld from the children that need it just because it’s locked away in a trust.
Therefore, debts that offend public policy are the only debts that will defeat a spendthrift provision. One question that a Florida court has not answered is whether spendthrift provisions protect against civil judgments from criminal victims. According to Florida statute 960.293, in a civil suit for damages filed by a crime victim against a convicted offender, the crime victim is entitled to liquidated damages in an amount equal to the actual damages award.
So can a victim of a crime be awarded through the perpetrator’s trust in Florida? There is limited case law on the issue, but the appeals court sided against the spendthrift provision in the case of Levine v. Levine, case number 2d16-2499. In this case, the underlying judgment did not originate as a civil judgment, but was entered against the Appellant after he was convicted in California in 2006. The court in California ordered the Appellant to pay his father $366,500.00 with interest from the date of sentencing.
The appellant court affirmed the trial court’s ruling without a written opinion that the spendthrift provision did not protect against the court’s order. The answer to the appeal argued that Florida public policy favors victims being compensated for the crimes committed against them. It is likely that this judgment will now create precedence that criminal restitutions can defeat a spendthrift provision, however, for a more definite answer the issue will need to appear before Florida’s Supreme Court.
Other jurisdictions have sided differently on the issue, such as Maryland in Duvall v. McGee. This court held that while public policy can defeat a spendthrift trust provision, a crime victim is still an ordinary judgment creditor and the claim does not defeat a spendthrift provision. The court clarified that family and tax obligations are related to duties, and not to mere debts.
For more information on spendthrift provisions and other great asset protection ideas contact the Jacksonville estate planning attorney at The Law Office of David M. Goldman PLLC today.