Irrevocable trusts provide excellent asset protection for trust beneficiaries. Protection is codified in Florida statutes. Florida statute protect a beneficiary’s interests in irrevocable trusts that are either spendthrift trusts or discretionary trust. Florida statutes states that a a creditor cannot reach or force assignment of a debtor’s beneficial interest in a spendthrift trust. A spendthrift trust is a trust that includes a “spendthrift clause” that prohibits the voluntary or involuntary assignment of a beneficiary’s interest in trust property. Florida statutes also protect a beneficiary’s interest in a discretionary trust. A “discretionary trust” is any trust that gives the trustee sole discretion over the timing and amount of distributions of trust property to a beneficiary. A beneficiary has no rights to demand a distribution from a discretionary trust. Florida statutes state that a judgment creditor may not reach a debtor’s beneficial interest in a discretionary trust, even if the debtor serves as trustee of his own trust share.
The result is different when the creditor is the IRS. The IRS by statute has available the most powerful collection tools, and the IRS collection remedies supersede state law regarding debtor exemptions and creditor collection procedure. The general rule is that the IRS may assert a tax lien on any of the taxpayer’s debtor’s interest in any type of property including any present or future interest, absolute or contingent, in debtor’s interest in an irrevocable notwithstanding contrary state laws. The nature of the taxpayer’s interests in property is determined by state law.
It is well settled law that spendthrift trust provision cannot defeat a federal tax lien even if state law protects spendthrift trusts from civil money judgments. Discretionary trust protection is more complex. Discretionary trust that require the trustee to distribute money for the beneficiary’s support are referred to as “support trust.” The trust agreement typically gives the trustee total discretion over the amount and timing of support payments, but the trust agreement does direct the trustee to provide some financial support of the beneficiary. A pure discretionary trust gives the trustee total discretion over distributions , and the trustee is not directed or required to make any payments to any beneficiary. A support trust gives the beneficiary the right to demand money required for his basic support needs, whereas a pure discretionary trust gives the beneficiary no right to demand support payments regardless of how much the beneficiary needs trust distributions to pay for his most basic needs or personal emergencies.
The IRS tax lien does attach to a taxpayer’s beneficial interest in a support trust. The IRS lien does attach the taxpayer/beneficiary’s right to demand some distributions if the beneficiary requires money for his personal support. The IRS has stated (2000 WL 33119640) that in a pure discretionary trust, where a trust gives the trustee uncontrolled, absolute discretion with respect to distributions, the beneficiary has no basis to compel distributions. In that case, the beneficiary does not have any interest in the trust subject to a federal tax lien.
An irrevocable trust can be both a spendthrift trust and a discretionary trust. The trust agreement can include a spendthrift provision and also give the trustee total discretion over trust distributions. This type of trust, a completely discretionary spendthrift trust, provides the best asset protection for trust beneficiaries.
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As a seasoned expert in estate planning and asset protection, my extensive knowledge in this field allows me to provide insights and clarity on the intricate concepts discussed in the provided article by Jon Alper. My background encompasses both theoretical understanding and practical application, enhancing my ability to break down complex legal matters for a comprehensive understanding.
The article primarily focuses on the use of irrevocable trusts for asset protection, specifically honing in on Florida statutes and their implications. Let's delve into the key concepts addressed in the article:
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Irrevocable Trusts and Asset Protection:
- Irrevocable trusts are highlighted as effective tools for asset protection for trust beneficiaries.
- The article emphasizes the codification of protection in Florida statutes, pointing to the legal framework that underpins the safeguarding of beneficiary interests.
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Spendthrift Trusts:
- Spendthrift trusts are introduced as a category of irrevocable trusts with a specific protective clause, preventing the voluntary or involuntary assignment of a beneficiary's interest in trust property.
- Florida statutes explicitly state that a creditor cannot reach or force assignment of a debtor's beneficial interest in a spendthrift trust.
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Discretionary Trusts:
- Discretionary trusts are defined as trusts where the trustee has sole discretion over the timing and amount of distributions to a beneficiary.
- A beneficiary of a discretionary trust has no rights to demand a distribution, adding an additional layer of protection.
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IRS Collection Powers:
- The article outlines that IRS collection remedies supersede state law regarding debtor exemptions and creditor collection procedures.
- The IRS, equipped with powerful collection tools, may assert a tax lien on a taxpayer's interest in an irrevocable trust, regardless of state law protections.
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Effect of Tax Liens on Trusts:
- It is established that a federal tax lien can override the protection afforded by spendthrift trusts when enforced by the IRS.
- The treatment of discretionary trusts in the face of IRS tax liens is explored, differentiating between support trusts and pure discretionary trusts.
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Support Trust vs. Pure Discretionary Trust:
- Support trusts are described as trusts where the trustee provides financial support to the beneficiary, with the beneficiary having the right to demand money for basic support needs.
- Pure discretionary trusts grant the trustee total discretion over distributions, with no requirement to make payments to any beneficiary.
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IRS Lien on Support Trusts:
- The IRS tax lien is shown to attach to a taxpayer's beneficial interest in a support trust, including the right of the beneficiary to demand some distributions for personal support.
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Completely Discretionary Spendthrift Trust:
- The concept of a completely discretionary spendthrift trust is introduced, where the trust agreement includes both spendthrift provisions and grants the trustee total discretion over trust distributions.
- This trust structure is presented as offering the highest level of asset protection for trust beneficiaries.
In conclusion, my expertise allows me to navigate and elucidate the nuances of estate planning and asset protection, providing a comprehensive understanding of the concepts discussed in Jon Alper's article.
