Spendthrift Trust Law and Legal Definition

A spendthrift trust is a trust that restrains the voluntary and involuntary transfer of the beneficiary's interest in the trust. They are often established when the beneficiary is too young or or doesn't have the mental capacity to manage their own money. The person creating a trust is called the grantor, donor or settlor. When a trust is established, an individual or corporate entity is designated to oversee or manage the assets in the trust. This individual or entity is called a trustee. The person who is benefitted by the payments from the trust is the beneficiary.

Spendthrift trusts typically contain a provision prohibiting creditors from attaching the trust fund to satisfy the beneficiary's debts. The aim of such a trust is to prevent it from being used as security to obtain credit. The beneficiaries of a spendthrift trust are prohibited from assigning their interests in the income or principal of the trust. In a broader sense, the term "spendthrift trust" may include other forms of trusts, such as discretionary trusts, wherein the trustee has discretion to decide the time, amount, or manner of payments to a beneficiary; trusts for the support and education of the beneficiary; trusts are conditional on the beneficiary reaching a certain age, competency of the beneficiary to manage property, or solvency of the beneficiary.

The vast majority of states ave upheld the validity of spendthrift trusts or spendthrift provisions in trusts have found whether the interest of the beneficiary is for life, for a term of years, or whether it is an interest in the principal. Jurisdictions that do not recognize the validity of spendthrift trusts generally recognize the validity of the other forms of protective trusts discussed above

To create a valid spendthrift trust there be some provision for the restraint on, or immunity of, the interest of the beneficiary from voluntary or involuntary alienation. Furthermore, a spendthrift trust must comply with the requirements for to the creation, existence, and validity of trusts generally. Therefore, a spendthrift or other protective trust must comply with applicable statutes and public policy. The settlor (creator) of a spendthrift trust may not establish the trust for his or her own benefit. Also, the beneficiary of a spendthrift trust cannot be granted the entire power to control or dispose of the trust property without invalidating the spendthrift provision of the trust.

The following is an example of a state statute governing spendthrift trusts:

"A. Any instrument creating a trust may provide by specific words that the interest of any beneficiary in the income of the trust shall not be subject to voluntary or involuntary alienation by such beneficiary. Subject to the following provisions of this section, a direction to this effect shall be valid and enforceable.

B. Notwithstanding a provision in the terms of a trust restraining the alienation of the interest of a beneficiary, such interest shall be entitled to be reached in the satisfaction of claims to the following extent:
1. All income due or to accrue in the future to the beneficiary shall be subject to enforceable claims under the laws of this state for:
a. support of a husband, wife, or child of the beneficiary,
b. necessary services rendered or necessary supplies furnished to the beneficiary, or
c. a judgment based on any such claim under subparagraph a or b; and
2. In all cases not mentioned in paragraph 1 of this subsection, all income due or to accrue in the future to the beneficiary in excess of Twenty-five Thousand Dollars ($25,000.00) per calendar year shall be subject to garnishment by creditors of the beneficiary and shall be fully alienable by the beneficiary.

C. Where two or more creditors undertake to reach the interest of any beneficiary of a trust, pursuant to the provisions of this section, they shall be subject to priority of payment in the order of the service of a notice of garnishment on the trustee. The pendency of any attachment or garnishment shall not prevent the filing of a further attachment or garnishment by the same or any other creditor.

D. Where the beneficiary of any spendthrift trust is also the beneficiary under any other spendthrift trust created or administered either within or without this state, the aggregate income payable under all such trusts to the beneficiary shall be considered together for the purpose of determining the rights of creditors and assignees under this section.

E. The right of any beneficiary of a trust to receive the principal of the trust or any part of it, presently or in the future, shall not be alienable and shall not be subject to the claims of his creditors.

F. Where the interest of the beneficiary of a trust is subject to the exercise of discretion by the trustee or by another, the provisions of this act as to the rights of creditors and assignees shall apply with respect to any sums which the trustee or such other person determines shall be paid to or for the beneficiary.

G. A trust in which the interest of the beneficiary is subject to restraints on alienation as provided in this act may be called a "spendthrift trust" and a direction in any instrument creating a trust that the interest of any beneficiary shall be held on or subject to a spendthrift trust shall be sufficient to restrain the alienation of such interest to the extent provided in this act.

H. Nothing in this act shall authorize a person to create a spendthrift trust or other inalienable interest for his own benefit. The interest of the trustor as a beneficiary of any trust shall be freely alienable and subject to the claims of his creditors. [Editor’s Note: This paragraph is discussed further in relation to Self-Settled Trusts a/k/a Asset Protection Trusts.

I. The provisions of this section may be enforced only by an action in a court of competent jurisdiction and the obligor beneficiary shall be a party defendant in such action. The trustee shall not be required to recognize any of the obligations provided for in this section or to withhold any income from the beneficiary until said trustee has been served with summons or garnishment summons. Such action shall be governed by the rules of civil procedure under the laws of this state."