Is An Asset Protection Trust Effective In Florida?

It’s easy to assume that only wealthy individuals need an asset protection trust. In reality, protecting your assets is more important if you fall in a moderate wealth bracket, so to speak. 

An asset protection trust is a self-settled trust which protects your assets from creditors. In other words, if you create the trust and transfer assets to it, you’re also considered a trust beneficiary. A clear example of this is a revocable living trust which is also self-settled.

However, many people are confused by the fact that in Florida, self-settled trusts don’t provide you with asset protection. The judgment creditor can still collect interest from a trust that was created for their own benefit by the debtor.

Is there an alternative, though?

Let’s get over the basics first!

What Is A Domestic Asset Protection Trust?

In some US states, Congress has enacted statutes that allow self-settled trusts to receive asset protection benefits. These are considered domestic asset protection trusts and they offer protection against the execution of a judgment debtor’s property. On paper, the trust legally owns the property and its terms prohibit distributing income to the judgment creditor.

What Is The Main Purpose Behind An Asset Protection Trust?

In simple terms, its main purpose is attracting assets and businesses into its state by providing an easy form of creditor protection. 

The statutes that allow these trusts have a lot of similarities. For instance, these trusts are usually irrevocable, meaning that the trust maker can’t back out and remove or change terms or the beneficiaries of the trust.

Additionally, an average domestic asset protection trust requires one of the trustees to be either a corporation doing business in the state or a state resident. The same principle applies to the assets of the trust because at least some trust assets have to be deposited in the state.

It’s also worth noting that the statues also provide a trust protector. This is an individual tasked with protecting the interests of the trust maker by vetoing the decisions about distribution suggestions made by the trustees if they are harmful to the trust maker.

Why Doesn’t Florida Allow Domestic Asset Protection Trusts?

While states like Utah, Nevada, Delaware, and Alaska have favorable asset protection trust laws, Florida, unfortunately, doesn’t. In fact, the Sunshine State has a public policy against the concept of providing asset protection in self-settled trusts.

Why is that?

Simple - issues with conflict of law.

Let’s use the following example to illustrate this position:

If a resident of Florida creates a self-settled trust in Delaware, there is a serious legal issue at hand. Are Florida courts applying laws that are against self-settled trusts, or will they follow the laws of the asset protection trust state?

Due to different public policies, it’s very complicated to resolve the conflicts between the asset protection trust state and Florida.

However, the asset protection trust created by the residents of the Sunshine State will be effective if all the parties, records, and assets are located in the domestic asset protection state. That’s about it. The more parties and assets are situated in Florida, the courts will have a strong Florida law bias. 

Does A Living Trust Provide Asset Protection?

Many people think a revocable trust provides a level of asset protection, which simply isn’t true. The key purpose of these types of trusts is to avoid guardianship during the time the trust maker is alive, and more importantly, bypass probate once the trust maker has passed away.

Also, some assume that a living trust can also help them protect assets. The answer is once again unfavorable as it doesn’t because this type is also self-settled since the main beneficiary is the trust maker. Hence, in Florida, this trust is eliminated as a form of asset protection.

Can A Spendthrift Trust Be Used As An Alternative To An Asset Protection Trust?

The main purpose of this trust is to prevent the beneficiary’s creditors from gaining assets from the trust before they are first distributed to the beneficiary of the trust. According to Florida statutes, a spendthrift provision is a term that restricts transferring of the beneficiary involuntarily or voluntarily. 

Thus, a grantor can easily support a particular beneficiary while also restricting them from selling or wasting assets from the trust. In short, this type of trust protects the parties involved from ‘’squandering’’ the assets and protects the trust’s assets from the beneficiary’s creditors.

The effectiveness of the spendthrift trust as an alternative to an asset protection trust depends on how the trust is prepared by the attorney. For instance, if it’s set up as a self-settled trust, naturally, it’s not going to offer any asset protection under Florida statutes, since it’s established for the benefit of the trust maker.

Yet, in a trust agreement that contains a spendthrift provision, the beneficiary’s interest in the trust is protected in the eyes of Florida courts. This provision dictates that a beneficiary doesn’t assign or convey their interest since the most common goal of this provision is preventing the beneficiary from losing those assets, such as squandering an inheritance.

Therefore, no creditors can force the assignment to pay off the beneficiary’s debts as the trust maker forbids the beneficiary from assigning any of the assets in the trust.

In other words, for this trust to be effective in asset protection, the trust must be created with a spendthrift provision and set up by any trust maker that isn’t the beneficiary. On top of that, an attorney needs to see to it that the provision also stops the voluntary and involuntary transfer of the trust interest. The trust must contain this language in order for the provision to meet statutory requirements. 

Get In Touch With The Law Offices of Mary E. King to Set Up A Trust

Setting up a spendthrift trust requires a high level of expertise, which is why you should look for an experienced trust law attorney. 

Here at the Law Office of Mary E. King, our attorneys have decades of experience setting up different kinds of trusts and can help you with all your trust-related matters. 

Call 941-906-7585 or fill out our online contact form to receive expert legal advice from Florida’s most experienced trust attorneys!

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.