In the recent case, Miller v. Kresser, 2010 Fla. App Lexis 6152 (Fla. 4th DCA 2010), a Florida Appeals court overturned the ruling of a lower court which allowed a creditor to reach the assets of a trust.
The lower court allowed the creditor to reach the assets of the trust because the beneficiary exerted significant control over the trust, the trustee was related to the beneficiary, and the trustee basically failed to perform the administrative duties expected of a trustee. The appeals court overturned that ruling and upheld the asset protection provided by the trust despite the fact that the trustee was not fulfilling his duties.
Lessons learned from this case:
1. Courts continue to uphold the asset protection provided by a spendthrift trust, even in cases where the operation of the trust is imperfect.
2. You can improve your chances of protecting trust assets by appointing an independent professional as the trustee instead of appointing a family member.
3. If you must appoint a family member as a trustee, appoint an independent professional as a co-trustee in order to add legitimacy to the trust.
4. A trustee who does very little administration and allows the beneficiary too much control over the trust will jeopardize the asset protection provided by the trust. The trustee should keep books and records, participate in regular meetings, make investment decisions, sign tax returns, and take part in the administration of the trust.
5. Distribution of income and principal should not be mandatory at any time, but should be left to the unfettered discretion of the trustee.
6. The trust should be located in a jurisdiction that supports the asset protection provided by an irrevocable spendthrift trust.