Florida Irrevocable Trusts

What Is an Irrevocable Trust?

An irrevocable trust is a legal arrangement where the grantor permanently transfers assets into the trust, relinquishing control over them. It is used for asset protection, estate tax reduction, and eligibility for certain government benefits

Once you create an irrevocable trust, the terms of the trust cannot be modified or terminated without the consent of the beneficiaries.

Understanding Irrevocable Trusts

Florida irrevocable trust laws are found in Chapter 736, Florida Statutes, and in common law and court decisions interpreting trust law. Florida law provides that property held in an irrevocable trust is protected from the creditors of the trust beneficiaries. The most important legal principles that provide asset protection to trust beneficiaries are:

1. The spendthrift protection
2. The discretionary distribution protection.

Key Features of an Irrevocable Trust

1. Fixed Terms: Once established, the terms of the irrevocable trust cannot typically be changed. This means the grantor relinquishes control over the assets and the terms of the trust.
2. Asset Protection: Assets transferred into an irrevocable trust are generally protected from creditors, lawsuits, and claims against the grantor. Because the assets no longer belong to the grantor but to the trust itself, they are usually beyond the reach of personal creditors.
3. Estate and Tax Benefits: Transferring assets into an irrevocable trust can help reduce the taxable estate of the grantor. This is particularly advantageous for individuals facing potential estate taxes, as it can significantly decrease estate tax liability.
4. Avoidance of Probate: Like revocable trusts, assets held in an irrevocable trust do not go through probate. This leads to a potentially faster, private, and less costly distribution of assets upon the grantor’s death.

Types of Irrevocable Trusts in Florida

1. Life Insurance Trusts: Often used to exclude life insurance proceeds from the grantor’s taxable estate while providing liquidity to the estate and beneficiaries.
2. Charitable Trusts: Enables grantors to make significant charitable contributions, which can also provide tax benefits and serve philanthropic goals.
3. Special Needs Trusts: Designed to benefit a person with disabilities by providing financial support without jeopardizing their eligibility for government assistance.
4. Spendthrift Trusts: Protects a beneficiary’s inheritance from their own potential recklessness, creditors, or poor financial management by limiting the beneficiary’s access to the trust funds.

Steps to Create an Irrevocable Trust in Florida

1. Draft the Trust Document: Work with an estate planning attorney to draft a trust document that clearly defines the trust’s terms, beneficiaries, and the powers granted to the trustee.
2. Select a Trustee: Choose a reliable and trustworthy individual or financial institution to manage the trust. The trustee will be responsible for managing the trust assets according to the trust’s terms.
3. Fund the Trust: Transfer assets into the trust. This might include securities, real estate, or cash. Properly retitle these assets to reflect that they are now owned by the trust.

Spendthrift Provisions for an Irrevocable Trust

A beneficiary’s interest in an irrevocable trust established for their benefit by another person is protected from that beneficiary’s creditors if the trust agreement includes a spendthrift clause.

A spendthrift clause states that a beneficiary may not assign or convey their beneficial interest. This trust clause is a “spendthrift” clause because the provision was initially designed to prevent an imprudent beneficiary from voluntarily squandering their inheritance by assigning their trust interest to another person. Spendthrift protection is based on the idea that a beneficiary’s creditors cannot force a beneficiary to do involuntarily what the beneficiary cannot do voluntarily under the trust document. So, when the trustmaker prohibits the beneficiary from assigning their trust interest voluntarily to a third party, the beneficiary’s creditors cannot force an involuntary assignment to pay the beneficiary’s debts.

Florida courts have consistently applied asset protection to irrevocable trusts. Florida law provides that a spendthrift provision must expressly restrain voluntary and involuntary transfers of a beneficiary’s trust interest to protect the beneficiary’s interest from creditors. After a trustee makes a distribution from a spendthrift trust to a beneficiary, the money in the beneficiary’s hands is no longer protected from the beneficiary’s creditors by the trust spendthrift clause.

Florida law makes two exceptions to the spendthrift protection. First, the law prohibits a trustee of an irrevocable trust from withholding a distribution required under the trust agreement solely to protect the distribution from the beneficiary’s creditors. Overdue mandatory distributions can be garnished from a spendthrift trust.

The second exception from spendthrift trust protection applies to “special creditors” or “creditors of last resort.” These special creditors include claims by a beneficiary’s child, claims of a former spouse for support and maintenance, and claims by creditors (such as an attorney) who have provided services for the protection of a beneficiary’s interest. The special creditor may garnish a beneficiary’s interest and distributions from an otherwise protected spendthrift trust.

Irrevocable Trust Discretionary Distributions

There is another basis of protection of a beneficiary’s interest in an irrevocable trust agreement that gives the trustee discretion over the amount and timing of distributions to beneficiaries. These trusts are referred to as “discretionary trusts.”

Section 736.0504(1) of Florida law states that a beneficiary’s creditor cannot compel a trustee to make a discretionary distribution of income or principal to a trust beneficiary when the distribution would become vulnerable to the beneficiary’s creditors. This protection against forced distributions is valid regardless of whether the trustee’s discretion is subject to an express standard and regardless of whether the trustee may have abused their discretion.

Most spendthrift trusts include discretionary distributions. However, the legal protection from creditor judgments of discretionary distributions is separate and distinct from the protection provided by spendthrift provisions.

The asset protection of an irrevocable discretionary trust applies even when the beneficiary is also the trustee, provided that the trustee’s discretion to distribute property to themselves is subject to an ascertainable standard. A typical ascertainable standard for discretionary distributions is the beneficiary’s health, education, maintenance, and support (referred to as “HEMS” discretion). If the trust agreement’s provisions include an appropriate HEMS standard, a debtor who is both a trust beneficiary and the appointed trustee over their own trust share can withhold distributions to protect the trust property from their creditors.

Self-Settled Florida Irrevocable Trusts

An irrevocable self-settled trust provides no asset protection benefits. A self-settled trust is a trust where the trustmaker is also a beneficiary. In other words, a self-settled trust is created by a trustmaker for their own benefit.

A revocable living trust is an example of a self-settled trust. Florida trust law expressly states that regardless of whether a self-settled trust agreement includes a spendthrift provision, the trustmaker’s property transferred to the trustmaker’s trust is subject to the trustmaker’s creditors’ claims. Florida courts have denied creditor protection to self-settled trusts for reasons of public policy.

FAQs about Irrevocable Trusts