fbpx

PROTECTING YOUR INHERITANCE THROUGH A DISCRETIONARY TRUST

Dr. Cory, a well-respected surgeon and man about town, came from money.

He carries no malpractice insurance.

He has met with his asset protection attorney and has made use of the generous Florida exemptions and has 2 limited liability companies.

His parents are getting older and their health is deteriorating.  At the same time, he knows that his marriage is precarious.

Clearly, he knows that his expected inheritance could be lost in a lawsuit.  All that needs to happen is for his parents to leave him his inheritance outright at the wrong time.

Often in estate planning and asset protection, we are forced to make choices.  Do we buy exempt assets such as cash value life insurance, which get good tax benefits, but incur a load?  Do we pay off the mortgage on our homestead to build equity, but lose the interest deduction?  This is not the case with a discretionary spendthrift trust.

Here’s how it works in Dr. Cory’s case. His parents met with their estate planning attorney who recommended that upon the second death, Dr. Cory’s share would be held in a discretionary trust for the benefit of himself, his descendants, and optionally, his spouse.  The Trustee, who should not be Dr. Cory, would decide whether to retain the assets in trust or distribute the income and/or principal to one or more of the above class of beneficiaries, all at once or periodically.  The Trustee is free to give all of the assets to one or more of the beneficiaries to the exclusion of the others.

By way of background, a “spendthrift trust” is a trust that contains language to the effect that the trust assets are not assignable by the beneficiary, either voluntarily or involuntarily. The purpose of this is to ensure that the monies contributed by the grantor (often a parent) benefits the beneficiary and not the beneficiary’s creditors.  Except for certain support obligations, a beneficiary’s right to present or future distributions from the trust cannot be intercepted by a creditor of a beneficiary, through legal process.

A discretionary trust is one in which a distribution to a beneficiary is subject to the trustee’s discretion. For example, if the trustee has discretion to retain the assets or distribute income or principal to the beneficiary, this would constitute a discretionary trust.

Even a power of the trustee to distribute based upon certain ascertainable standards, such as for the beneficiary’s support, education, and healthcare, is considered a discretionary trust.

A discretionary trust may or may not contain spendthrift language.  Whether or not a discretionary trust contains spendthrift language, the beneficiary’s right to present or future distributions cannot be intercepted by a creditor of a beneficiary, through legal process.

It is clear that a discretionary trust cannot be subject to legal process by a regular creditor such as a patient. Thus Dr. Cory’s inheritance is secure against his patients and regular creditors.   It is less clear for what is known as exception creditors which include a spouse, former spouse, or child who has a court order for support or maintenance against the beneficiary of a discretionary trust. Although a literal reading of the Florida Statutes provides that support obligations for a spouse, former spouse, or child do not constitute an exception to this rule, there is at least one case that held otherwise.

If you are anticipating an inheritance, this is a good strategy to present to your benefactors and an easy change for them to make in their estate planning documents.  While some children are reluctant to talk about these matters with their parents, our experience is that parents are open to such discussions when presented properly.   Just ask your parents if they want their money to end up with one of your patients!

Contact Form
Menu
Font Resize