Do you need to pay income tax on a trust? Every state has different laws regarding whether a trust is taxable in that state. The following post reviews current laws regarding trust taxation in North Carolina and other states our firm serves, although careful review of each state's tax laws is recommended to determine whether trust income is taxable in a particular state.
Some types of trusts offer more flexibility and protection than others, but even discretionary trusts can’t protect beneficiaries in all cases. Discretionary trusts allow trustees to use solely their own discretion on how to distribute income and principal of the trust. When individuals in Florida choose a discretionary trust for flexibility in asset protection planning, they should be aware of the limitations these tools impose.
Florida’s discretionary trust statute addresses distributions and spendthrift provisions. Under Florida state law, there are two circumstances when assets in a discretionary trust may be at risk: Spousal support or child support claims that are court-ordered. These claims may only be made if there is evidence that payments are not available from any of the trustee’s other assets.
A November 2013 ruling in Berlinger v. Casselberry highlights how Florida law affects assets in discretionary trusts. The case involved Bruce Berlinger and his ex-wife Roberta Sue Casselberry. Berlinger’s divorce in 2007 requires him to pay Casselberry $16,000 per month in spousal support. After receiving court orders to pay spousal support, Berlinger transferred his assets into a discretionary trust in an attempt to avoid paying alimony. (If Berlinger had already transferred his assets into a discretionary trust prior to the court order, he would still be liable for spousal support payment.) He stopped making alimony payments in May 2011.
Casselberry later sued and the courts issued writs of garnishment against Berlinger’s trust. In November 2012, the Florida courts ordered that all future distributions from Berlinger’s trust would be made directly to Casselberry until alimony payments were satisfied. One year later in Berlinger v. Casselberry, the court ruled:
According to section 736.0504(2), a former spouse may not compel a distribution that is subject to the trustee’s discretion or attach or otherwise reach the interest, if any, which the beneficiary may have. 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 instant trusts are discretionary. Casselberry is not seeking an order compelling a distribution that is subject to the trustee’s discretion or attaching the beneficiary’s interest.
The example above illustrates how discretionary trusts are vulnerable to certain claims, and individuals should consider the risks when it’s time to create or modify a trust. Our asset protection attorneys in Miami can advise which strategy offers the most benefits to suit your unique situation. Provisions can also be added to a trust for added protection. Also, trusts can be created in any jurisdiction—and the trust creator can designate the trust be transferred to an alternate jurisdiction upon their death. Learn about Domestic Asset Protection Trusts and Offshore Trusts and discuss them during routine reviews with your attorney.