Legal Definitions - Spendthrift Trust

Spendthrift Trust

A Spendthrift Trust is a type of legal arrangement specifically designed to protect a beneficiary's interest in trust assets from both their own potential financial mismanagement and from their creditors.

Under the terms of a Spendthrift Trust, the beneficiary is legally prohibited from selling, giving away, or assigning their right to receive future distributions from the trust. This means they cannot transfer their entitlement to someone else, nor can they use it as collateral for a loan. Crucially, the assets held within the trust are generally shielded from the beneficiary's personal creditors. The trustee maintains control over the trust property, managing it according to the trust's instructions and making distributions to the beneficiary as specified, but the principal assets themselves remain inaccessible to the beneficiary's creditors.

• Example 1: Protecting an Impulsive Beneficiary

  Imagine a wealthy grandparent who wants to leave a significant inheritance to their grandchild, Sarah. However, Sarah has a history of impulsive spending and has accumulated substantial credit card debt in the past. To ensure Sarah receives long-term financial support without the funds being quickly depleted or seized by her creditors, the grandparent establishes a Spendthrift Trust. The trust dictates that Sarah cannot sell her right to future payments from the trust, nor can her credit card companies or other creditors claim the trust's principal assets to satisfy her debts. The trustee manages the funds and provides regular distributions to Sarah, ensuring she has a steady income stream that is protected.

• Example 2: Providing for a Business Owner with Financial Risks

  John is a successful entrepreneur, but his business ventures inherently carry financial risks. His parents want to ensure that even if one of John's businesses fails and he faces significant personal liabilities, a portion of their estate will remain secure for his family. They create a Spendthrift Trust for John. If John's business goes bankrupt and creditors pursue his personal assets, the funds held within the Spendthrift Trust are protected. John cannot assign his interest in the trust to his business creditors, and those creditors generally cannot reach the trust's principal or future distributions to satisfy his business debts, providing a financial safety net.

• Example 3: Supporting a Beneficiary Susceptible to Undue Influence

  An elderly widow, Mrs. Davis, wishes to provide for her adult son, Mark, who is kind-hearted but easily persuaded by others, sometimes leading him to make poor financial decisions or lend money he cannot afford to lose. To safeguard his inheritance, Mrs. Davis establishes a Spendthrift Trust. This trust prevents Mark from giving away his interest in the trust to friends or acquaintances who might try to take advantage of his generosity. It also ensures that if Mark were to incur personal debt, his creditors could not compel him to assign his trust distributions to them, thereby preserving the assets for his long-term benefit as intended by his mother.