Estate planning professionals say a Florida appellate court ruling issued last month gives ex-spouses grounds to obtain funds from a type of trust that was thought to be beyond their reach.
Wealthy individuals set up a discretionary trust to give a trustee discretion to make or not make cash distributions from the fund. A Nov. 27 ruling by Florida’s Second District Court of Appeal gives ex-spouses and the children of beneficiaries more leeway to gain access to those funds under certain circumstances.
The ruling clarifies Florida trust law. However, estate planning professionals are divided on whether it establishes a precedent affecting trusts in other states.
In Berlinger vs. Casselberry, Bruce Berlinger challenged a lower court ruling allowing his ex-wife, Roberta Casselberry, to garnish a discretionary trust fund after he stopped paying her $16,000 a month in alimony. The trust had been paying all of his expenses directly and did not distribute funds to him.
Typically, a creditor is not allowed to garnish funds in a discretionary trust if the trustee does not make distributions to the beneficiary. However, the court determined the ex-spouse, as an “exception creditor,” could seek garnishment of distributions from the discretionary trust to satisfy the former husband’s alimony obligation.
“The reason we put things in trusts is so people can’t bring a claim,” said Mia Frabotta, a partner in the family law and trust estates practice for McCarter & English in Boston. “However, there are exception creditors, such as ex-spouses and children of the beneficiary, and that means the court can allow that class of people to make a claim. What this really does is takes Florida’s law to the next level.”
Frabotta called it 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, she said.
“No trust is foolproof. But if you choose one of these states, you might be in better shape in protecting trust assets,” she said.
Florida is attractive because it has no income tax and or estate tax, said Thomas V. Collins III, first vice president and financial advisor for RBC Wealth Management in Florham Park, N.J. However, the appellate ruling could make clients leery about setting up a trust in that state, he said.
“If you are dealing with a client with potential marital issues, maybe, Florida is not the right place to establish the trust,” Collins said.
Another case financial planners should be aware of involves Washington State real estate developer Donald G. Huber, who set up a trust in Alaska when his business started going south. After he filed for bankruptcy, a court disallowed the creation of the Alaska trust to shield his assets from creditors because Huber didn’t live in Alaska and the majority of his assets were in Washington.
“That is a huge case,” which could affect trusts set up in other states for asset protection purposes, said Jerome L. Wolf, a partner with Duane Morris in Boca Raton, Fla. “That’s why it is better to set up these trusts offshore.”
Another new wrinkle in trust law is what is known as decanting, which is a way to modify an old trust, said Mary H. Schmidt, founding partner of Schmidt & Federico, a Boston law firm.
“Picture taking wine out of one vessel and putting it into another so it can breathe,” she said. “Well, it is very popular now with long-term trusts to go to court to change the parameters of the trust.”
The Kraft family, which owns the New England Patriots, decanted some of their family trusts in Massachusetts last July (Morse vs. Kraft) so the four sons of patriarch Robert Kraft could have more control over the assets of their respective trusts.
Schmidt said decanting is a trend that will continue.
“If you don’t want a trust to be decanted in the future, you should affirmatively state that (intent) when the trust is being drafted,” she said.
