Spendthrift TrustThe Benefits of a Spendthrift Trust

For many of us, the point of working with an attorney to create an ironclad Estate Plan is to ensure that our children and other friends and family are well taken care of after we are gone. There are several types of trusts that can address issues that people might not typically find in more simplistic plans.

For example, perhaps you have a nephew that you want to be taken care of, but you know that he has issues with gambling, or for other reasons you think it would be a better idea for him not to receive a lump sum of money all at once.

A Spendthrift Trust not only creates a limitation on the amount of money that the beneficiary receives, but it also creates a disabling restraint on alienation. The settlor (person who creates the trust) can implement a spendthrift clause which prohibits a voluntary or involuntary transfer of a trust interest. Thus, it is technically impossible for anyone else to oust the beneficiary.

Distinguishing Factors

An ordinary trust without any special protections may be subject to creditors' reach due to unpaid expenses, lawsuit judgments, etc. A spendthrift trust, in contrast:

  • Prevents beneficiaries' creditors from reaching property that is in the trustee's hands before distribution. i.e. they cannot get a hold of the entire trust's assets, only whatever the amount is that is paid to the beneficiary after it is paid out.
  • Once the money is paid out, however, there is no protection from creditors, the property simply becomes a part of the beneficiary's property.

Exception Creditors

Exception creditors are parties that are an exception to this rule, and can collect debts directly from the trustee. Spendthrift provisions are ineffective against the following four creditors:

  • Spouses & Children seeking support--Children are particularly aided by this exception, because they are dependents.
  • Creditors who provided "necessities" to the beneficiary-- These include things like food, shelter, clothing. Typical examples of these types of creditors include grocers or landlords, etc.
  • Services that benefit the beneficiary's interest in the trust-- These could include creditors such as lawyers that do substantial work for the beneficiary regarding the trust in question.
  • Governmental claims-- Such as tax liens, medical benefits, housing benefits, etc.

Consult with an Estate Planning Lawyer today to discuss whether a Spendthrift Trust is right for you.