What is a Spendthrift Provision?

A “spendthrift provision” is a clause in a Trust or a Will that protects a beneficiary against a creditor attaching prior debts against the beneficiary’s inheritance as well as preventing the beneficiary from acquiring debt based on the future inheritance. 

The protection offered by a spendthrift provision prevents a beneficiary’s creditors from being able to force a Trustee or Personal Representative to pay the beneficiary’s share to the creditor instead of to the beneficiary. A spendthrift provision is valid only if the provision restrains both voluntary and involuntary transfer of a beneficiary’s interest. When a Trust provides that the interest of a beneficiary is held subject to a spendthrift trust, or words of similar import, that is sufficient to invoke the rights. 

Creditors of a beneficiary cannot attach, i.e. gain a secured interest in, the trust assets so long as the assets remain in the trust. Once the beneficiary receives a payment from the trust, the creditor can seek repayment of the debt from that issued payment.

For example, 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 his nephew a set amount of money on an annual basis.

The spendthrift clause in the trust bars the nephew’s creditors and gambling bookies from seeking payment for his debts directly from the trustee of the trust and from attaching an interest on his future distributions. It also bars the nephew from assigning his future rights to payments from the trust. This means that the nephew cannot obtain credit for buying a house or making a bet or the like by proving 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.