What is a Spendthrift Trust?
A spendthrift trust is one in which the right of a beneficiary to future payments from the trust cannot be voluntarily or involuntarily transferred by the beneficiary or reached by the beneficiary’s creditors. While in trust, assets are unattainable until they are distributed. The beneficiary of a spendthrift trust does not need to be an actual spendthrift – the settlor of the trust need only to want to keep the beneficiary (or the beneficiary’s creditors) from accessing the trust assets before distribution.
A Brief History
Under English common law, spendthrift trusts were invalid. English law reasoned that a person’s right to alienability was vital, plus creditors held a lot of power in England. However, the Supreme Court of the United States disagreed with this notion, noting that not allowing for spendthrift provisions was an alienation of a testator’s right to dispose of property to specific persons. When assets are in trust, the gift to the beneficiary has not technically been given to them, and the court felt there was something wrong with creditors being able to take gifts from debtors before the debtor even received the gift.
Requirements of a Spendthrift Trust
While spendthrift trusts are generally created through a specific provision within the Will or the trust document, there is typically no specific language needed to create a spendthrift trust. There just needs to be intent to restrain voluntary and involuntary transfers by the beneficiary.
The settlor of the trust cannot be a beneficiary of the trust for the spendthrift provision to be valid. There are some states where the settlor can restrain alienation and be a beneficiary, but these trusts are called “asset-protection trusts,” which are different than spendthrift trusts for this very reason. Spendthrift trusts are to preserve assets for beneficiaries outside of the settlor him or herself.
Exceptions to the Spendthrift Provision
Some states have created exceptions for child support and alimony. These exceptions are to allow children and former spouses access to funds of support to which they otherwise would not have access. This is not the case in all states though. Minnesota does not currently allow for any exceptions to spendthrift provisions, not even child support.