Trusts are a common estate planning tool. Reasons to create and fund a trust range from asset protection to providing for someone with special needs. Some trusts even have similar purposes. Two such trusts are the spendthrift and discretionary trust – similar enough, but with significant differences. Knowing which trust to use is critical.
In a trust document, the person creating the trust (a grantor or settlor) names a trustee to manage assets of the trust (the trustee) for the benefit of one or more beneficiaries. There’s always a purpose behind creating a trust. In some cases, the grantor may be trying to protect the trust for a beneficiary with creditor claims or judgments. That’s where spendthrift and discretionary trusts come into play.
Under Florida law, a spendthrift provision in a trust does just that – protects the beneficiary’s inheritance from the beneficiary’s spendthrift ways. With this type of trust, beneficiaries cannot transfer their inheritance interest to anyone, and creditors are not able to take any of the trust funds.
However, certain types of creditors are exempt and may still attach spendthrift trust assets:
Funds disbursed to a beneficiary are no longer protected from seizure by the terms of the trust.
With a discretionary trust, the trustee decides how and when the trust disbursements will be made. If a beneficiary has a track record of reckless financial behavior, or if creditors are clamoring at the door, the trustee may be able to withhold payments to the beneficiary. The trustee may also pay for a beneficiary’s expenses, rather than handing the money directly to the beneficiary.
The most significant difference might be the way the trust assets are controlled. The trustee might have to make disbursements in compliance with a trust document that contains spendthrift language. With a discretionary trust, the trustee has more control over who gets the funds; therefore, discretionary trusts generally offer greater asset protection to beneficiaries.
With both trusts, once the money is given to the beneficiary, it’s fair game for creditors. The trustee of a discretionary trust, though, can pay a beneficiary’s tuition or mortgage directly and bypass the beneficiary entirely. Money paid for the bills is not vulnerable to a creditor’s claims because the beneficiary didn’t take possession of the money.
Spendthrift and discretionary trusts are not for everyone, and you need an attorney who knows the differences. Attorney John Mangan is board certified in Wills, Trusts & Estates by the Florida Bar. Please call us at 772-324-9050 or use our Contact Form to set up an appointment. We help clients throughout Florida, including Stuart, Palm City, Hobe Sound, Jupiter, and Port St. Lucie.