The definition of a spendthrift trust is kind of ambiguous. There aren’t really spendthrift trusts, like there is an insurance trust, children’s trust, living revocable trust, or charitable remainder trust. Let’s start with the definition of a spendthrift.
Spendthrift Definition
A spendthrift is someone who can’t manage money. A spendthrift just lets money flow through their fingers. In order to protect a child or someone from their own money mismanagement skills (some of them are very skilled at money mismanagement), a spendthrift provision should be put in any trust you draft.
A spendthrift trust is simply a trust that has a spendthrift provision in it. There really isn’t a spendthrift trust form or document with 30 or so pages of a trust. A trust is protected against spendthrift issues by a simple clause only one paragraph long.
A spendthrift clause simply prevents a beneficiary (guy who gets the benefit of the trust) from getting their greedy little hands on their beneficial interest until it is released by the terms of the trust. As long as there is some type of spendthrift clause in the trust, it will be considered a spendthrift trust.
A sample spendthrift clause is as follows:
Spendthrift Trust Clause
Except as otherwise provided in this Trust Agreement, all payments of principal and income which are payable, or will become payable, to the beneficiary of any Trust created by this Agreement shall not be subject to anticipation, assignment, pledge, sale, or transfer in any manner. Nor shall any beneficiary have the power to anticipate or encumber any such interest. Nor shall such interest, while in the possession of the Trustees, be liable for, or subject to, the debts, contracts, obligations, liabilities or torts of any beneficiary. Such interests shall also be free from any claim, control, or interference of the spouse of a married beneficiary, or the parent of a beneficiary.
When you use a spendthrift trust clause in the trust you set up for estate planning, i.e., a living revocable trust, you can prevent the kids (beneficiaries) from losing their inheritance.
Note in the above spendthrift clause, the beneficiary is prevented from anticipating their inheritance. More or less, the beneficiary can’t spend their money until they get it. The spendthrift clause also prevents the beneficiary from assigning, pledging or selling their beneficial interest.
This clause will protect the trust from the beneficiary’s creditors. The creditor will try to attack the trust; because that is the only hope the beneficiary has of ever having any money. With a spendthrift clause in the trust, the creditor will be blocked from getting the trust assets – at least until the assets are distributed from the trust, according to the terms of the trust.
The purpose of a spendthrift trust is to protect trust assets from the acts of the beneficiaries. Our courts and laws simply say that if you put a spendthrift clause in the trust, the trust assets will be protected from the actions of the beneficiary. If you don’t use a spendthrift clause, then the trust assets can often be accessed by creditors of the beneficiaries before the terms of the trust say that assets are to be distributed.
Another question is, “Will a spendthrift clause protect trust assets from your creditors, assuming you are the grantor (guy who sets up the trust)?” That’s very different from the question, “will it protect spendthrift trust assets from the beneficiary’s creditors?”
The answer is, NO. A spendthrift clause will not protect revocable trust assets from the grantor’s creditors. Most of the living trusts, land trusts, and other trusts you’ll use will not protect the trust assets from your (the grantor’s) creditors.
You don’t have to scratch your head wondering, “What is a spendthrift trust?” It isn’t a specific “type” of trust. It is simply a trust (any trust) that has a spendthrift clause imbedded in it.
In my book, Protecting Your Financial Future, I go through three other things you can “write into” your living revocable trust that will protect your kids from their own stupidity or immaturity.
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