Berlinger v. Casselberry
By: Morris Law Group - February 14, 2014
Is your Florida Discretionary Trust protected against claims of creditors?
In Berlinger v. Casselberry, 2013 Fla. App. LEXIS 18908 (Fla. 2d DCA 2013), the court affirmed a trial court's order that granted a writ of garnishment against a beneficiary's distributions received from a discretionary trust. This case is unique because the writs of garnishment were applied to discretionary trusts which is contrary to the widely held belief that discretionary trusts are protected from all classes of creditors. It had been thought that support trusts (which must rely on their spendthrift provision for protection) are protected from all creditors except for certain classes of exception creditors as determined by case law or by judicial determination on a state-by-state basis. So what made this case so different to allow for attachment of a discretionary trust? Here are the facts.
As part of Bruce Berlinger's and Roberta Casselberry's 2007 marital settlement agreement, Berlinger agreed to pay Casselberry $16,000.00 a month in permanent alimony. Meanwhile, Berlinger and his new wife were supported almost entirely by the Berlinger Discretionary Trusts. In May 2011, Berlinger voluntarily stopped paying alimony to Casselberry, and upon Casselberry filing a motion to enforce and for contempt, the trial court issued writs of garnishment to the trustee of the Berlinger Discretionary trusts. Berlinger appealed the trial court's order and argued that Florida Statute § 736.0504 prohibited the attachment of distributions made to Berlinger because the trusts were discretionary.
The Second DCA however disagreed with Berlinger and cited the Florida Supreme Court's decision in Bacardi v. White, and §§ 736.0503 and 736.0504 stating "The Florida Supreme Court concluded that, in support cases, the restraint of spendthrift trusts should not be an absolute bar to the enforcement of alimony orders... it would be unjust and inequitable to allow the debtor to enjoy the benefits of wealth without being subject to the responsibility to support those whom he has a legal obligation to support."
According to section (2)(a) of 736.0503, a spendthrift provision is unenforceable against "a beneficiary's former spouse who has a judgment or court order against the beneficiary for support or maintenance and permits the former spouse to obtain a court order attaching present or future distributions to or for the benefit of the beneficiary. However, the former spouse's rights are limited by § 736.0504, which prevents the former spouse from compelling a distribution when that distribution is subject to the trustee's discretion.
However, the Berlinger court held that although the court may not compel distributions by a trustee of a discretionary trust, any distributions made by the trustee may be subject to a writ of garnishment. Florida's public policy of favoring spendthrift provisions in trusts gives way to Florida's stronger public policy favoring enforcement of alimony and support orders.
It is interesting to note that Florida Statutes §736.0503(3) allows this remedy "only as a last resort upon an initial showing that traditional methods of enforcing the claim are insufficient." In
Berlinger, he deliberately evaded paying alimony and failed to disclose material items at his deposition which provides some but not total clarity on what 'last resort' actually means. It will be interesting to see how Florida case law develops in this regard, and whether 'last resort' actually means a spouse is not paying alimony, is not being forthright about his or her assets or a combination of the two.
Berlinger still represents a "narrow ruling" that does not set a precedent affecting trust law cases in other states. About 30 states, including Florida, have some type of exception creditor provision in their trust codes. States such as South Dakota, Nevada, Arkansas, Michigan, Kansas and Tennessee either do not recognize the rights of ex-spouses to garnish a trust or have restrictive exception creditor laws.
Based on this case, many clients are asking our firm the best way to handle these issues. Often, we will have our clients avoid using Florida law for any irrevocable trust where the expectation is that the trust assets shall be protected from family claims against a beneficiary of the trust. The selection of a different jurisdiction may be made to avoid a statute similar to the one in Florida. In addition, our firm will ensure that your irrevocable trust contains provisions to allow the trustee or a trust protector to change jurisdictions. Our firm advises clients to give an independent party the power to add and remove beneficiaries, including the ability to remove that beneficiary and add that beneficiary's spouse. Then, the beneficiary will not receive the funds, but the spouse will and the beneficiary can live off those funds while avoiding creditor issues.
The example above illustrates how discretionary trusts are vulnerable to certain claims, and individuals should consider the risks when it's time to create or modify a trust. If you are concerned with regards to these issues, contact us at email@example.com or (561) 750-3850. We will discuss your situation and determine the best way to navigate these new emerging issues in the area of estate planning and asset protection.
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.