The laws regarding irrevocable trusts are presented in the Florida Statutes, Chapter 736, the common law, and in judicial determinations of trusts and the laws of trusts.
An irrevocable trust is created through an agreement between the settlor, trustee, and the beneficiary or beneficiaries, which cannot be revoked or terminated. The transfer of assets into the trust is a permanent gift of property that cannot be taken back by the settlor or creator of the trust.
An irrevocable trust will often include a “spendthrift provision” which purpose is to prevent the rapid depletion of the trust by its beneficiaries and to protect the trust assets or corpus from the creditors of such beneficiaries.
A spendthrift clause provides that the beneficiaries of the trust may not assign, sell, or convey their beneficial interest. Such provision is based upon the concept that the creditors cannot attach property that the beneficiary may not willingly convey.
In Florida, a spendthrift provision must expressly restrain or prohibit both involuntary and voluntary distributions or transfers of the beneficiary’s interest for the provision to be effective against creditor assaults against such beneficiary.
However, once assets or monies are distributed to such beneficiaries, such property is no longer under the protection of the trust and the spendthrift provisions.
Florida does maintain exceptions to the protection given by the spendthrift provision. A trustee may not withhold a distribution for the sole purpose of protecting trust assets from a beneficiary’s creditors and mandatory distributions, which are late in payment pursuant to the trust, may be subject to attachment or garnishment by the beneficiary’s creditors.
Additionally, the spendthrift provision may not apply to “creditors of last resort” or “special creditors.” These special creditors may include claims by the beneficiary’s child, children, or spouse for maintenance and support, as well as claims by parties that provided services relating to the protection of such beneficiary interest.
In the absence of such exceptions, the distribution of assets into a spendthrift trust may also be attacked as a fraudulent conveyance.
Another provision in the trust agreement gives the trustee discretion over the distribution of monies and assets to beneficiaries, which provides additional protection against creditors of such beneficiaries. This is referred to as discretionary trust.
Florida law provides that a creditor of a beneficiary cannot force the trustee to issue a discretionary distribution of property to the trust beneficiary if such distribution would render such monies subject to attachment by the beneficiary creditors. Such distribution cannot be compelled even if the trust agreement provides such discretion is subject to an express standard or the trustee has otherwise abused his or her discretion [Florida Statutes 736.0504(1)].
This quality of asset protection is available even in circumstances wherein the trustee is also the beneficiary, as long as the discretion provided by the trustee is subject to an ascertainable standard.
Generally, such standard is discretionary distributions may be made for purposes of the beneficiary’s health, education, maintenance or support. This is often referred to as the HEMS discretion.
Self-Settled Trusts in Florida have no asset protection value. A self-settled trust is a trust wherein the creator and donor to the trust are also the beneficiaries. The creator makes the trust for his own benefit. Even if such a trust contains spendthrift and discretionary distribution provisions, the property contained in the trust is subject to claims by the creditors of the beneficiary.
Although by its description, an irrevocable trust cannot be altered or revoked under some circumstances an irrevocable trust may be “reformed”, modified, or even revoked and bled of its assets. Under Florida Law an interested person may seek the reformation of the trust if clear and convincing evidence is produced indicating that the trust terms do not manifest the intent of the trust maker.
For example, in many instances, such trusts are created for tax benefit purposes. If the tax laws change so that such benefits are no longer present, the trust may be reformed or modified to accomplish such purposes.
The Florida Statutes provide that an irrevocable trust may be amended after the death of the Settlor if the unanimous agreement of all trust beneficiaries and the trustee is present.
There is provision under Florida Law for the “decanting” of a trust wherein the trustee essentially “pours” the trust property from the irrevocable trust into another or second trust device. The property is then subject to the terms of the second trust [Florida Statute 736.0117].Florida Law also permits the termination of an irrevocable trust by the trustee if the trust is no longer economically feasible, the standard being that the assets of the trust are less than $50,000 in value and such amounts do not justify the continued administration of the trust.