KYEstates often dicusses asset protection developments, and we’re pleased to share a really fascinating Florida decision, Miller v. Kresser, — So.3d —, 2010 WL1779899 (Fla. 4th DCA 2010). Juan Antunez broke the news that this is surely a season of May flowers for asset protection planning. There won’t often be victories for pure judicial formalism like Miller. The case is a appellate lawyer’s or law professor’s dream, because in Miller, the facts were bad for the debtor, but that didn’t matter. At all. Let’s review the asset fortress that is Miller, shall we?
In April, 2004, the debtor’s mother established a discretionary spendthrift trust for the benefit of her son, James, the debtor. Her other son, Jerry, was the sole trustee and had absolute discretion to make distributions for James and his qualified spouse.The trust’s spendthrift provision provides as follows:
The right of any person to receive any amount, whether of income or principal, pursuant to any of the provisions of this agreement, shall not, in any manner, be anticipated, alienated, assigned or encumbered, and shall not be subject to any legal process or bankruptcy or insolvency proceeding or to interference or control by creditors or others.
As trustee, Jerry had discretion to terminate the trust:
In granting the trustee discretion over the payment of the income and principal of the trusts under this agreement, it is the settlor’s intention that the independent trustee . . . (2) shall have complete discretion to terminate any trust by distributing the entire principal to the beneficiary or beneficiaries eligible to receive distributions from such trust (and if more than one, in equal or unequal shares and to the exclusion of any one or more of them) without further accountability to anyone if the independent trustee determines that continuation of such trust is inadvisable in view of the size of the trust or for any other reason.
After creating the trust, the settlor conveyed a one-third interest in a residence in Islamorada, Florida to the trust. She retained another third, and transferred the final third to a (presumably similar) trust for Jerry. The house’s value exceeded $1 million.
In June, 2007, Kresser (who had been in a business deal with James, obtained a judgment against James for somewhat over $1 million. After the judgment was entered against James, his mother (wisely) updated her estate plan, amending her revocable trust to eliminate an outright disposition to James, instead directing James’ share of her wealth to the trust she had created for James’ benefit.
When Kresser wasn’t able to collect his judgment from James, he (wisely) decided to follow the money:
[H]e brought proceedings supplementary against them and impleaded Jerry, as trustee of the James Trust.Kresser asserted that he was entitled to execute on the James Trust’s assets, including its one third interest in the Islamorada property, because James exercised dominion and control over all of the trust assets and over Jerry, as trustee. Kresser also recorded a lis pendens in Monroe County, Florida on the Islamorada property.
Somewhat surprisingly, given the recorded lis pendens, a third party purchaser bought the Islamorada property while the lawsuit was in progress, and a bank provided mortgage financing. [They must have had a lot of confidence in spendthrift trusts....] The trust for James received one third of the sale proceeds.
After a bench trial, the trial court found that the trust was valid at the time the trust was settled and funded. Nonetheless, the trial court recited a litany of bad facts:
The court found that Jerry had almost completely turned over management of the trust’s day-to-day operations to James. James controlled all important decisions concerning the trust assets, including investment decisions. Jerry never independently investigated these decisions to determine whether they were in the best interest of the trust, and some of the decisions have turned out to be unwise. The trial court concluded that Jerry simply rubber-stamped James’s decisions and “serve[d] as the legal veneer to disguise [James's] exclusive dominion and control of the Trust assets.”
Based on these facts, the trial court held that:
James’s exclusive dominion and control over the James Trust served to terminate the trust’s spendthrift provision, allowing Kresser to reach all of the trust’s assets to satisfy his judgment…[and] that Jerry, by giving James control over the trust and complete access to the trust’s assets, effectively turned over to James all of the trust’s assets… thereby subjecting the assets to execution.
Due to the lis pendens, the trial court also directed that the clerk issue a writ of execution for the execution, levy, and sale of the trust’s one-third interest in the property.
The Fourth DCA identified the issues on appeal as follows: 1) whether a court can invalidate a spendthrift provision in a discretionary trust where the beneficiary has no express control over the trust, and thereby allow the beneficiary’s creditors to reach trust assets before they are distributed; and 2) whether a merger occurred such that the James Trust terminated by law or through Jerry’s exercise of discretion as trustee.
The appeals court briefly reviewed the applicable law, noting that:
- Florida law recognizes the validity of spendthrift trusts.
- When a trust includes a valid spendthrift provision, a beneficiary may not transfer his interest in the trust and a creditor or assignee of the beneficiary may not reach any interest or distribution from the trust until the beneficiary receives the interest or distribution.
- When a trust requires mandatory distributions to a beneficiary, a creditor or assignee of the beneficiary may reach those distributions if the trustee has not made them within a reasonable time after the designated distribution date.
- Courts have invalidated spendthrift provisions where a trust provides a beneficiary with express control to demand distributions from the trust or terminate the trust and acquire trust assets.
Turning to the specifics of the trust, the appeals court observed that the trust “does not give James any express control over distributions of the assets.” Rather, “Jerry, as trustee, has sole discretion to distribute income or principal to James, or to terminate the trust.”
The appeals court agreed with the trial court that “the facts in this case are perhaps the most egregious example of a trustee abdicating his responsibilities to manage and distribute trust property” Nonetheless, the appeals court believed, these facts didn’t matter, because:
…the law requires that the focus must be on the terms of the trust and not the actions of the trustee or beneficiary. In this case, the trust terms granted Jerry, not James, the sole and exclusive authority to make distributions to James. The trust did not give James any authority whatsoever to manage or distribute trust property.
Reviewing F.S. 736.0504, the appeals court observed:
There is no law in Florida suggesting that a beneficiary’s creditors may reach trust assets in a discretionary trust simply because the trustee allows the beneficiary to exercise significant control over the trust. It is only when a beneficiary has received distributions from the trust, or has the express right to receive distributions from the trust, that the creditor may reach those distributions.
Happily for James, the appeals court preferred to focus on hypothetical possibilities rather than actual facts:
In this case, James may ask Jerry for as many distributions as he wants, and Jerry may choose to fulfill all of those requests. However, because Jerry has sole discretion to make distributions, he may also choose to deny James’s requests at any time, and James would have no recourse against him unless he were abusing his discretion as trustee.
Accordingly, the appeals court held that until “Jerry makes a distribution to James, Kresser and other creditors may not satisfy James’s debts through trust assets.”
Perhaps defensive regarding the judicial formalism in its opinion, the court explained that it had no choice but to hold for the debtor:
To conclude otherwise would ignore the realities of the relationship between a beneficiary and trustee of a discretionary trust — the beneficiary always pining for distributions which he feels are rightfully his, and the trustee striving to allow only those distributions that coincide with the settlor’s express intent, as set forth in the trust documents. It is the settlor’s prerogative to choose the trustee she believes will best fulfill the conditions of the trust. In the case before us, it is not the role of the courts to evaluate how well the trustee is performing his duties. We are instead limited, by statute, to evaluating the express language of the trust to determine the extent of the beneficiary’s control and the extent to which a creditor may reach trust assets. It is the legislature’s function to carve out any exceptions to the protections afforded by discretionary and spendthrift trusts. (emphasis added)
KYEstates hasn’t read such a lyrical judicial summation of a key truth of T&E law since Judge Mark Holmes paid homage to Jane Austen in his whimsical, wonderful opening sentence in Hurford v. Comm’r, T.C. Memo 2008-278 (Dec. 11, 2008) (“It is a truth universally acknowledged, that a recently widowed woman in possession of a good fortune must be in want of an estate planner.”)
The appeals court also found that the trust had not been terminated by merger, because the trustee, Jerry, had never conveyed legal title to trust assets to James, who held equitable title.
Because the appeals court had reversed the trial court’s finding that Kresser could reach trust assets before they were distributed to James, it quashed the writ of execution on the Islamorada house (welcome relief for the third party purchaser and the mortgagee).
Clearly, Miller is a landmark decision for Florida estate and asset protection planners and their clients. Juan Antunez observed that Miller “underscores the rock solid asset-protection values of a Florida spendthrift trust,” and that for litigators, the case is “pure gold” because it:
…should dramatically reduce the level of uncertainty and expense inherent in litigating this type of case. Rather than having to go through a full blown trial on the purely subjective question of how much beneficiary “dominion and control” is too much; now all you have to do is point to the trust agreement. If it has a valid spendthrift clause, game over, your client wins.
KYEstates previously noted that Florida is a creditor protection haven, and due to Miller, in the Fourth DCA at least, the Sunshine State is more than living up to its reputation. Miller is an excellent case study on how clients can benefit substantially from thoughtful trust planning (even if transfer tax planning is not a primary issue).