Legal Definitions - Spendthrift Clause

A Spendthrift Clause is a specific provision included in a trust document designed to protect the trust's assets from being claimed by the beneficiary's creditors or from being mismanaged by the beneficiary themselves. Essentially, it creates a "spendthrift trust."

This clause legally restricts a beneficiary from selling, giving away, or pledging their future right to receive money or assets from the trust. It also prevents the beneficiary's creditors from directly accessing the trust's principal or income payments before those payments are actually distributed to the beneficiary by the trustee. The goal is often to ensure that the trust's funds are used for the beneficiary's long-term support as intended by the person who created the trust, rather than being quickly depleted due to poor financial decisions or outstanding debts. While creditors generally cannot seize the trust assets directly, they may sometimes be able to claim payments after they have been made to the beneficiary. The enforceability and specific exceptions to spendthrift clauses can vary significantly depending on state law.

Here are some examples illustrating how a Spendthrift Clause works:

• Example 1: Protecting an heir with a history of debt
  Imagine a wealthy individual, Mr. Henderson, wants to leave a substantial inheritance to his adult son, Mark. Mark has a history of financial instability, including significant credit card debt and a tendency to make impulsive, large purchases. Mr. Henderson is concerned that if Mark receives a lump sum, it will quickly be seized by creditors or spent unwisely. To prevent this, Mr. Henderson establishes a trust for Mark that includes a Spendthrift Clause. The trust directs a trustee to distribute a fixed monthly allowance to Mark.

  How this illustrates the term: The Spendthrift Clause in Mr. Henderson's trust legally prevents Mark's existing credit card companies or any future creditors from directly accessing the trust's principal or future monthly payments before they are actually given to Mark. This ensures that the bulk of the inheritance remains protected within the trust, providing Mark with long-term financial support as intended by his father, rather than being immediately consumed by his debts or poor spending habits.

• Example 2: Shielding assets from business failure
  Sarah's parents established a trust for her benefit years ago, containing a Spendthrift Clause, to provide for her future. Sarah later decided to start a risky new business venture that, unfortunately, failed, leaving her with significant business debts and facing potential bankruptcy.

  How this illustrates the term: Because of the Spendthrift Clause, the assets held within Sarah's trust are protected from her business creditors and would not be included in any bankruptcy proceedings. This clause ensures that even though Sarah's personal business ventures failed, the funds set aside by her parents for her long-term well-being remain secure and inaccessible to those creditors, providing her with a financial safety net.

• Example 3: Protecting against personal legal judgments
  David is the beneficiary of a trust established by his grandparents, which includes a Spendthrift Clause. Years after the trust was created, David is involved in a serious car accident and is found to be at fault. The other driver sues David and wins a substantial monetary judgment against him for damages.

  How this illustrates the term: The Spendthrift Clause in David's trust prevents the judgment creditor from directly placing a lien on the trust's assets or garnishing future payments from the trust to satisfy the judgment. While David might be personally liable for the judgment, the trust's principal and undistributed income are shielded, ensuring the trust can continue to provide for David's needs as originally intended by his grandparents, despite his personal legal liabilities.