What is a Spendthrift Provision?

August 23, 2019

A "spendthrift provision" is a clause in a Trust or aWill that protects a beneficiary against a creditor attaching prior debtsagainst the beneficiary's inheritance as well as preventing the beneficiaryfrom acquiring debt based on the future inheritance. 

The protection offered by a spendthrift provision preventsa beneficiary's creditors from being able to force a Trustee or PersonalRepresentative to pay the beneficiary's share to the creditor instead of to thebeneficiary. A spendthrift provision is valid only if the provision restrainsboth voluntary and involuntary transfer of a beneficiary's interest. When aTrust provides that the interest of a beneficiary is held subject to aspendthrift trust, or words of similar import, that is sufficient to invoke therights. 

Creditorsof a beneficiary cannot attach, i.e. gain a secured interest in, the trustassets so long as the assets remain in the trust. Once the beneficiary receivesa payment from the trust, the creditor can seek repayment of the debt from thatissued payment.

Forexample, a rich uncle has assets that his nephew will inherit one day. However,this nephew is prone to gambling and doesn’t always make sound financial decisions.The uncle creates a trust containing a spendthrift clause, which pays hisnephew a set amount of money on an annual basis.

Thespendthrift clause in the trust bars the nephew’s creditors and gambling bookiesfrom seeking payment for his debts directly from the trustee of the trust andfrom attaching an interest on his future distributions. It also bars the nephewfrom assigning his future rights to payments from the trust. This means that thenephew cannot obtain credit for buying a house or making a bet or the like byproving that he has money being paid to him in the future from this trust.

For more information on setting up specific types of trusts to protect your assets, please contact Stouffer Legal at 443-470-3599 in the Greater Baltimore area.

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