Bacardi v. White
This article is a follow up to the March 2012 Florida Bar Journal article, "Bacardi on the Rocks." The article suggested that former spouses of beneficiaries of Florida discretionary trusts may be able to obtain a continuing garnishment over trust assets intended for the beneficiary, despite what appeared to be contrary law enacted as part of the 2006 Florida Trust Code in F.S. §§736.0603 and 736.0504. The article noted that those attorneys drafting estate planning documents frequently hear one objective of a parent who wants all or a portion of a child's inheritance to pass into a trust, rather than outright, is to prevent the child's spouse from reaching such assets in the event of divorce. The article suggested that beneficiaries of Florida trusts (as well as their lawyers) may be surprised that even when a discretionary trust is created to protect a child's inheritance, a former spouse may have rights as an exception creditor to reach assets in a discretionary trust. The article stated that attorneys advising their clients that a Florida discretionary trust would protect a child's inheritance in the event of divorce, should a spouse or former spouse obtain a judgment in the form of support against such child as a result of a divorce, may be misguided.
Subsequent to the publication of the article, members of a Trust Law subcommittee of the Real Property, Probate and Trust Law Section of The Florida Bar convened to determine if any clarifications should be considered to F.S. §§736.0503 and 736.0504, based upon Bacardi v. White, 463 So. 2d 218, 222 (Fla. 1985). A majority of the members believed that a white paper, dated October 13, 2006, explained the legislation to "correct unintended glitches in the Code and otherwise clarify the particular provisions addressed" was further evidence of the intent to override Bacardi. The white paper explanation for the clarifying changes reads as follows: "[T]hese changes are intended to clarify that the protection provided to discretionary interests trumps the rights given to exception creditors in s. 736.0503(2) and that includes not only the inability to compel distributions but the right to attach a beneficiary's interest or expectancy in the trust." A majority of the committee believed the white paper and statute were sufficiently clear. Possibly the portion of the current statute that provides that a creditor of a discretionary trust may not "attach or otherwise reach" was considered by the committee to be clear enough to protect the intended beneficiaries of discretionary trusts even from exception creditors. The first Florida court to review this issue held otherwise.
The article reads as follows:
The critical issue is whether F.S. 736.0504(2) means a spouse holding a judgment in the form of support cannot 1) force a distribution from a discretionary trust for the benefit of the spouse holding the judgment; and/or 2) garnish or otherwise reach or attach distributions from the discretionary trust before they are in the hands of the beneficiary ...
[T]he terms "attach" or "reach" are not defined in the Florida Trust Code and lend themselves to a number of interpretations as to whether a creditor may be able to garnish the interest of a discretionary trust once the trustee, in the trustee's sole discretion, is ready to exercise its discretion to make a trust distribution to the beneficiary.
The article cited the Florida Supreme Court decision in Bacardi that, prior to the enactment of the Florida Trust Code in 2006, controlled the rights of a spouse or former spouse holding a judgment in the form of support resulting from dissolution of marriage against two types of Florida trusts: 1) spendthrift trusts where the trustee has an obligation to make distributions to a beneficiary based upon a stated standard; and 2) discretionary trusts where the trustee has broader discretion whether to make a distribution. Bacardi held that with respect to spendthrift trusts that were not discretionary, a spouse or former spouse with a judgment in the form of support could seek a court order to obtain distributions otherwise provided to the intended beneficiary. For discretionary trusts, in which the trustee was not obligated to make present distributions to a beneficiary, Bacardi held that a court could not direct the trustee to make a distribution. However, if the trustee of a discretionary trust decides to make a distribution to the intended beneficiary, then such beneficiary's former spouse who has a judgment in the form of support may petition the court to grant a continuing garnishment. Thus, if the trustee wants to make a distribution to or for the benefit of the beneficiary under Bacardi, the beneficiary's former spouse holding a judgment could cut off the proposed distributions before they reach the hands of the intended beneficiary.
Did the Florida Trust Code Override Bacardi?
There is no official written indication as to whether the members of the Trust Law Committee of the Real Property, Probate and Trust Law Section of The Florida Bar, who provided technical assistance to the 2007 Florida Legislature, intended F.S. §736.0504, Discretionary Trusts; Effect of Standard, to override the Bacardi decision.
The article included comments of nine members of The Florida Bar's Real Property, Probate and Trust Law Section who worked on Florida's Trust Code drafting committee. The comments reflected disagreement on whether Florida's adoption of the Uniform Trust Code was intended to override Bacardi. The original article concluded that Florida law was unclear and, therefore, risky and that, with respect to potential claims of exception creditors (such as a former spouse), the laws of Nevada and South Dakota were much more clear and protective of discretionary trust beneficiaries who are subject to judgments in the form of support resulting from a dissolution of marriage. (Note that in 2013, Alaska passed legislation that in the author's opinion, makes its laws comparable with Nevada and South Dakota). Delaware is also worthy of consideration. In 2013, Delaware changed 12 Delaware Code §3536 to specifically exclude garnishment as a remedy of a creditor, and it provides the trustee with authority to make distributions from a discretionary trust for the benefit of the beneficiary.
Even after the above-described correction of unintended glitches, it was not clear that Bacardi was intended to be overridden. In fact, communications with the person on the committee who wrote the white paper made it clear that whether Bacardi was intended to be overridden needed clarification. Although the law has not been modified or clarified, the decision of Berlinger v. Casselberry, Case No. 2D12-6470 (Fla. 2d DCA Nov. 27, 2013), described below, is the first clear guidance as to whether Florida courts will continue to follow Bacardi after the 2006 Florida Trust Code enactment. Berlinger may be considered in the same vein as a "hangover" for asset protection attorneys.
Second DCA Holds Bacardi is Still the Law
Berlinger is a big win for former spouses and a nightmare for intended trust beneficiaries and trust settlors who may have created a discretionary trust anticipating that the funds were exclusively for the use of the intended family member and not the ex-spouse of the family member. The facts of Berlinger made it easy for the appellate judges to determine that the public policy reflected in Bacardi should continue in Florida, despite subsequent enactment of F.S. §736.0504.
The Berlinger Facts
Bruce Berlinger appealed an order of the trial court granting Roberta Casselberry's motion for contempt and motion for a continuing writ of garnishment over any disbursements made from the Berlinger Discretionary Trusts to or for the benefit of Berlinger. Although financially able to pay, Berlinger and his attorneys went to extraordinary lengths to avoid his support obligation to Casselberry. After 30 years of marriage, the spouses divorced in 2007. Pursuant to a marital settlement agreement ratified by the court and incorporated into the final judgment of dissolution, Berlinger agreed to pay Casselberry $16,000 a month in permanent alimony. Thereafter, Berlinger and his current wife enjoyed a substantial lifestyle sustained through payments made to them directly or on his behalf by the discretionary trusts including payments of all of his living expenses, mortgage obligations, property taxes, insurance, utilities, food, groceries, and miscellaneous living expenses. Although Berlinger continued to benefit from substantial distributions from the discretionary trusts, he voluntarily stopped paying alimony in May 2011.
When Berlinger stopped paying alimony, Casselberry filed a motion to enforce and for contempt. Just prior to the hearing, the parties reached a settlement wherein Berlinger agreed to satisfy his alimony arrears by liquidating an IRA account. After the IRA liquidation, more than $32,625.54 remained owing on the arrears judgment. The court issued writs of garnishment to SunTrust as trustee of the discretionary trusts.
Around September 2011, Berlinger was provided a Visa card from SunTrust Bank to use for paying expenses not directly paid by the trusts. The trusts paid the Visa credit card bills, including expenses for travel, entertainment, clothing, medical expenses, grooming, gifts, and Berlinger's current wife's credit card bills.
In January 2012, Casselberry filed a second motion for civil contempt and enforcement against Berlinger whereby the trial court issued writs of garnishment against SunTrust.
On April 26, 2012, Casselberry filed a motion for continuing writ of garnishment against SunTrust seeking to attach the present and future distributions made to or for the benefit of Berlinger. Casselberry alleged that traditional methods of enforcing alimony were insufficient.
On November 5, 2012, one day before the hearing on Casselberry's motion for continuing writs of garnishment, the new trustee (who replaced SunTrust) filed an action seeking a declaration that the family trusts at issue were discretionary trusts.
During the November 6, 2012, hearing, the new trustee testified that for the past year, the trustees had not made any payments directly to Berlinger. Instead, the trustees made payments on behalf of Berlinger and his current wife directly for their health insurance and household expenses, including the mortgage, property taxes, homeowner's insurance, electricity, water, garbage, sewer, telephone, internet, lawn care, pool care, and pest control. The new trustee asserted that the trusts were discretionary and opined that the applicable trust statute, F.S. §736.0504, prohibited any creditor, including Casselberry, from attaching any distributions paid on behalf or for the benefit of Berlinger. Neither Berlinger nor his current wife were employed and neither of them intended to look for work.
Evidence regarding the Visa credit card given to Berlinger in September 2011 reflected all bills went to the trustee who paid them from the trust assets. Berlinger also took cash advances on the card to pay his maid, provide cash to his current wife, and pay her personal expenses.
Berlinger argued F.S. §736.0504 prohibited Casselberry from attaching distributions from a discretionary trust for his benefit. Berlinger said F.S. §736.0504 specifically prohibited creditors from attaching "distributions from a discretionary trust, which are afforded greater protection from creditors under the Florida Trust Code.
On November 27, 2012, the trial court entered orders granting Casselberry's motion for continuing writs of garnishment.
Berlinger Holds that Bacardi Still Controls
The opinion in Berlinger was quite direct stating, "We conclude that the Florida Supreme Court's decision in Bacardi v White, 463 So. 2d 218 (Fla. 1985), is still controlling."
The court analyzed F.S. §§736.0503 and 736.0504, both enacted as part of the Florida Trust Code. Since the trust in Berlinger was a discretionary trust, the critical section was F.S. §736.0504(2), which provides a former spouse may not compel distributions that are subject to a trustee's discretion or attach or otherwise reach the interest, if any, which the beneficiary may have. The opinion states: "The section does not expressly prohibit a former spouse from obtaining a writ of garnishment against discretionary disbursements made by a trustee exercising its discretion. As a result it makes no difference that the trusts are discretionary." The opinion notes that the spouse seeking the continuing garnishment was not seeking an order to compel the trustee to make a distribution or allowing the creditor to "attach" the beneficiary's interest. "Instead, she obtained an order granting writs of garnishment against discretionary disbursements made by a trustee exercising its discretion."
The Berlinger opinion states: "Sections 736.0503 and 736.0504 codify the Florida Supreme Court's holding in Bacardi. Neither section protects a discretionary trust from garnishment by a former spouse with a valid order of support." The opinion goes on to state that Florida's public policy favoring spendthrift trusts protecting a beneficiary's income "gives way to Florida's strong public policy favoring enforcement of alimony and support orders. See Gilbert v. Gilbert, 447 So. 2d 299, 302 (Fla. 2d DCA 1984)."
The circuit court order referred to in the Berlinger DCA opinion adopted the approach laid out in Bacardi. The circuit court order on the continuing writs of garnishment stated: "all distributions made directly or indirectly to, on behalf of, or for the benefit of Berlinger by the trustees of all the Berlinger discretionary trusts to which Berlinger was a beneficiary would be made payable to Casselberry unless, at the time of any future distributions, there was no alimony or alimony arrears owed." Further, the circuit court order provided that if the trustee wished to make distributions to Berlinger beyond the amount of the outstanding amount of alimony, the trustee had to seek court approval before doing so to ensure that there remained sufficient assets in the trust to secure the continued payments of alimony.
The Hangover Remedy: What To Do Now
Consideration should be given to a debate as to whether Bacardi should remain the law in Florida for both spendthrift trusts and discretionary trusts. If so, F.S. §§736.0503 and 736.0504 should be clarified. If, instead the consensus is to override Bacardi and Berlinger, F.S. §§736.0503 and 736.0504 should be clarified by specifically stating that continuing garnishments are not permitted as a remedy to secure payments of alimony for the beneficiary of a discretionary trust, and payments should be authorized by a trustee directly to or for the benefit of a beneficiary, even one subject to a spousal support order. In such event, former spouses should be excluded as beneficiaries of discretionary trusts unless the creator of the trust intended a former spouse of a trust beneficiary to be an included beneficiary and so directs in the trust instrument. Bacardi appears to be the law in courts within the Second District Court of Appeal of Florida, and possibly other cases will follow. It is time to address the issues legislatively. Among the difficult issues are:
1) Should a parent or other settlor be able to create a trust to protect a child or other beneficiary such that the trust funds are held exclusively to benefit the beneficiary and specifically prohibit any distributions that would benefit a former spouse?
2) Should the holder of an unsatisfied judgment in the form of support as a result of a dissolution of marriage be able to garnish a discretionary trust held for the benefit of a former spouse so that if a distribution is made to or for the benefit of the former spouse, the judgment holder can cut off the funds through a continuing garnishment?
What is the Best Option Now for Florida Residents?
Until Florida law and public policy regarding discretionary trusts and their protection (or lack thereof) from a beneficiary's former spouse who has a judgment in the form of support is determined, parents desiring maximum Protection for their children should consider creating and administering discretionary trusts in Alaska, Delaware, Nevada, or South Dakota. Those clients who have already informed their attorneys of such concerns and objectives should be advised of Berlinger and the benefits of updating their estate planning documents by creating discretionary trusts in states such as Alaska, Delaware, Nevada, and South Dakota.
Can Trust Situs and Administration be Moved?
One issue that is beyond the scope of this article but gives reason for concern is whether the trustee of a Florida discretionary trust can move the trust situs (post Berlinger) after the beneficiary is subject to a judgment for support, especially when the beneficiary is not current on such alimony or support obligations. In other words, is it possible that such a situs change of the trust could be considered a fraudulent conveyance? Best practice may be to assure trust settlors are aware of the Berlinger and Bacardi attacks and leave it up to the settlor of the trust to decide whether to incur the expense and administrative burdens of creating and then administering the trust in a state other than Florida. Until these issues are resolved, disclosing the Berlinger case to clients and the above options should be considered.
It may be that the facts in Berlinger were simply too powerful for the Second District Court of Appeal to ignore. The trust assets allowed the beneficiary to live a lavish and luxurious lifestyle while refusing to satisfy his obligation to pay a judgment in the form of support held by an ex-spouse. This was a very compelling scenario for the Second District, and it used the opportunity to state its position on an issue that not all asset protection attorneys even felt was unclear. For better or worse, it is clear now – at least unless and until another district court of appeal in Florida, presented with a different set of facts, rules otherwise or the legislature changes the law.
1 Barry A. Nelson, Bacardi on the Rocks, 86 FLA. BAR J. 21 (Mar. 2012).
2 Real Property, Probate and Trust Law Section of The Florida Bar, White Paper on Technical Corrections to Florida Trust Code and Related Provisions at 130, Oct. 13, 2006, available to Real Property, Probate and Trust Law Section members of The Florida Bar at http://www.rpptl.org/Content/Committees/LegislativeReview/Revisions_to_Florida_Trust_Code.pdf.
3 Id. at 134.
4 Nelson, Bacardi on the Rocks, 86 FLA. BAR J. at 23.
5 Bacardi v. White, 463 So. 2d 218 (Fla. 1985).
6 See id. at 222 ("If disbursements are wholly within the trustee's discretion, the court may not order· the trustee to make such disbursements. However, if the trustee exercises its discretion and makes a disbursement, that disbursement may be subject to the writ of garnishment.").
7 See FLA. STAT. §736.0504: ''As used in this section, the term "discretionary distribution" means a distribution that is subject to the trustee's discretion whether or not the discretion is expressed in the form of a standard of distribution and whether or not the trustee has abused the discretion. (2) Whether or not a trust contains a spendthrift provision, if a trustee may make discretionary distributions to or for the benefit of a beneficiary, a creditor of the beneficiary, including a creditor as described in s. 736.0503(2), may not: (a) Compel a distribution that is subject to the trustee's discretion; or (b) Attach or otherwise reach the interest, if any, which the beneficiary might have as a result of the trustee's authority to make discretionary distributions to or for the benefit of the beneficiary. (3) If the trustee's discretion to make distributions for the trustee's own benefit is limited by an ascertainable standard, a creditor may not reach or compel distribution of the beneficial interest except to the extent the interest would be subject to the creditor's claim were the beneficiary not acting as trustee. (4) This section does not limit the right of a beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard for distribution."
8 Nelson, Bacardi on the Rocks, 86 FLA. BAR J. at 24, 26.
9 For a more detailed discussion on discretionary and spendthrift trusts under Article 5 of the Uniform Trust Code see Nelson, Are Trust Funds Safe From Claims for Alimony or Child Support?, 152 TR. & Est. 15 (Apr. 2013).
10 Alaska modified its discretionary trust statute effective September 9, 2013, see ALA. STAT. §34.40.113. For extensive articles discussing the changes to Alaska law, see Blattmachr, Chapman, Gans, & Shaftel, New Alaska Law Will Enhance Nationwide Estate Planning, Part 1, 40 EST. PLAN. J. 3 (Sept. 2013); Blattmachr, Chapman, Gans, & Shaftel, New Alaska Law Will Enhance Nationwide Estate Planning, Part 2, 40 EST. PLAN. J. 20 (Oct. 2013).
11 See 12 DEL. CODE §3536.
12 Berlinger v,. Casselberry, Case No.2D12-6470 at 6 (Fla. 2d DCA Nov. 27, 2013).
13 Id. at 9.
16 Id. at 6.
This article is a version of a previously published article, "Berlinger v. Casselberry: Discretionary Trust Held to be Available to an Alimony Creditor," by Leimberg Services in December 2013. A version of this article will also be published in Trusts and Estates magazine. This version is published with permission from both entities.
This column is submitted on behalf of the Real Property, Probate and Trust Section, Margaret Ann Rolando, chair, and Kristen Lynch and David Brittain, editors.
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