Well-meaning parents wanting to ensure passage of adult children’s inheritances into trusts often wish to keep the intended beneficiary’s former spouse from asserting any claim to trust funds in case of divorce and possible alimony. In states such as Pennsylvania, this may not be the case. Article 5 of the Uniform Trust Code, UTC, shields assets held by discretionary or spendthrift trusts from creditor claims but does not disturb the legal rights of children and former spouses of primary beneficiaries to entrusted assets.
That UTC aspect has sparked much debate and contentious litigation over whether former spouses who had been awarded court-ordered financial support could garnish discretionary trust assets. It has also prompted many prospective trust grantors to forum shop for venues where applicable statutes provide greater protection.
A recent case of first impression for the Florida State Court of Appeals centered upon whether the Florida Trust Code authorizes continuing garnishment of trust assets due to the primary beneficiary’s failure to pay alimony.
The appellant challenged a continuing writ of garnishment against discretionary trust assets granted in favor of the appellee. Per terms of the couple’s 2007 divorce settlement, the appellant, the ex-husband, had a legal obligation to make a monthly payment of $16,000 to his ex-wife. Although the ex-husband and his new wife subsequently enjoyed a lavish standard of living financed by discretionary trust asset distributions, he discontinued his ex-wife’s alimony payments in 2011.
The ex-husband argued that since the Florida Trust Code protects discretionary trust assets from creditor claims, the continuing garnishment order was unenforceable. The court rejected this argument. It interpreted the lack of express prohibition against garnishment of discretionary disbursements to satisfy spousal maintenance judgment orders.
This case subsumes two powerful but conflicting public policy issues of grantor rights to ensure exclusive beneficiary receipt of trust distributions vs. spousal support payees to garnish entrusted assets intended to benefit a former spouse. Although that case is undoubtedly not dispositive, parents are best advised to seek safe harbor in Alaska, Nevada or South Dakota trust laws. A lawyer that specializes in divorce law may be able to offer guidance on which states fall under the umbrella.
Source: Wealth Management , “Update: Are Trust Funds Safe From Claims For Alimony or Child Support?“, Barry A. Nelson , December 09, 2013
