What is a spendthrift provision?

| Nov 8, 2015 | Financial Planning

Financial struggle knows no prejudice. Hard times can hit anyone regardless of their job, education or family status. Even individuals that are the beneficiaries of trusts can go through a period of financial hardship. People in this situation may wonder what claim a creditor may have to their trust and the assets within it. Fortunately, most well-drafted trusts include a clause known as a spendthrift provision, designed to protect assets from creditors in the event of judgment or default by the beneficiary.

Even if the grantor of a trust does not intend to include a spendthrift provision it may be included anyway. Trusts that include a spendthrift clause are irrevocable and prevent the beneficiary’s creditors from having any claim to the assets within it.

Only after the assets within the trust have been distributed to the beneficiary, does the spendthrift provision end. At that time, creditors can go after the distributed assets to settle debts or judgments. This is the case for almost all creditors unless the creditor is seeking payment for back owed alimony or child support. In the event there is a judgment for court ordered alimony or child support, the creditor can compel payment from the trust regardless if there is a spendthrift provision attached.

Occasionally, the grantor is also the beneficiary. This is sometimes a way for a grantor to protect assets from events like divorce or bankruptcy. These self-settled trusts may include a spendthrift clause but are more difficult to uphold in the event that a creditor seeks payment from the assets. The reason spendthrift provisions are more difficult to use in self-settled trusts is because of the fear the trust was created as a way to defraud creditors.

Trusts are a great way to protect assets while they wait to be distributed to loved ones. Creating a well-drafted trust is key to providing adequate protection for assets in the event a beneficiary has a judgment against them, files bankruptcy or gets a divorce. A skilled attorney can help create an irrevocable trust with a spendthrift provision included in it.