What is a Spendthrift Trust?

A spendthrift trust is specifically designed to benefit one or more beneficiaries, while at the same time protecting the trust’s assets, and/or the beneficiary’s interest in those assets, from the beneficiary’s creditors.  This type of spendthrift trust is an irrevocable trust.  While the term “spendthrift” implies that the beneficiary must have a poor financial history or problems with excessive spending, this is not always the case.  Most irrevocable trusts have a spendthrift clause, simply to protect the assets in the trust from the beneficiary’s current or future creditors, or from money judgments that might attempt to attach the trust proceeds.  On the other hand, a spendthrift trust can be used to curb a spendthrift beneficiary’s customarily poor spending habits.

Important Things to Know

By appointing a trustee with the power to disburse assets to the beneficiary only as he or she sees fit, the settler, or the person establishing the trust, can prevent the spendthrift beneficiary from immediately spending all of the trust proceeds, without retaining any assets for the long-term.  Most of the time, a trust will not be considered to be, or treated as a spendthrift trust unless the trust document specifically outlines the settlor’s intent that a spendthrift trust be created.  In other words, the trust document must contain specific language that indicates that the settlor wanted to create a spendthrift trust.  While spendthrift trusts are generally effective against creditors in jurisdictions who recognize them as legally valid, there are some types of creditors who are permitted to utilize the beneficiary’s interest in the trust, despite its spendthrift provisions.  For instance, if a beneficiary owes child support or alimony, most jurisdictions will permit an invasion of the trust assets in order to pay these obligations.

Getting Legal Help

If you plan on establishing any type of trust, including a spendthrift trust, you should take care to consult an attorney who specializes in drafting trust documents.  In order to qualify as a spendthrift trust, the trust document must contain specific language showing the settlor’s intent to establish a spendthrift trust.  Therefore, it is essential that you work with your attorney in order to create a legally valid spendthrift trust.