Spendthrift Trust

A spendthrift trust is a trust whose terms include a spendthrift provision: a clause preventing the beneficiary from selling, assigning or pledging their interest, and preventing the beneficiary's creditors from attaching it. The point is to make the beneficiary's future entitlement legally untouchable while it remains in the trustee's hands, so that a beneficiary who is young, vulnerable, poor with money or exposed to claims still receives what the settlor intended rather than seeing it consumed by an assignment or a judgment.

The name misleads slightly, and correcting it is the most useful thing this page does. There is no separate legal instrument called a spendthrift trust. The Uniform Trust Code provision that most state trust codes enact is captioned "spendthrift provision," and it works on a clause inside an otherwise ordinary trust. As enacted in Montana, section 72-38-502 provides that "a spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary's interest," and then supplies a shortcut: "a term of a trust providing that the interest of a beneficiary is held subject to a 'spendthrift trust', or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary's interest." So the phrase survives in the statute as the drafting formula that invokes the protection, which is exactly why people talk about the trust rather than the clause.

Both directions, or neither. The validity rule is stricter than it looks. A clause that blocks creditors but leaves the beneficiary free to assign their interest is not a partly effective spendthrift provision; it is not one at all, because the statute conditions validity on restraining both voluntary and involuntary transfer. The logic is that a beneficiary who can sell their interest can defeat the restraint themselves, so the restraint has to bind both the beneficiary and the people pursuing them.

The protection stops at the moment of receipt, and that is where most misunderstandings live. The operative sentence says a creditor or assignee of the beneficiary "may not reach the interest or a distribution by the trustee before its receipt by the beneficiary." Before receipt, the beneficiary's interest is not an asset a judgment creditor can seize and not a right the beneficiary can pledge. After receipt it is money like any other, subject to garnishment, levy and everything else. A trust paying a fixed monthly amount therefore protects the stream and not the payments, which is one reason discretionary distribution standards are so common in trusts drafted for a beneficiary with real exposure: what the trustee has no obligation to distribute is harder for a creditor to anticipate than a fixed entitlement.

The exception creditors, and why no national list belongs on this page. A state that has enacted the uniform trust code either carries, or omits, a section listing the claimants a spendthrift provision cannot be enforced against, and a state that has not enacted it answers the question its own way. The variation is not theoretical: Montana enacted the validity section and the settlor's-creditors section and left the exceptions section, 72-38-503, as "reserved." Nebraska did enact it. Its section 30-3848, which the state's own code annotates as the uniform section, provides that "a spendthrift provision is unenforceable against: (1) a beneficiary's child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance; (2) a judgment creditor who has provided services for the protection of a beneficiary's interest in the trust; and (3) a claim of this state or the United States to the extent a statute of this state or federal law so provides." That is Nebraska's list. It is a fair guide to the shape of the question and it is not authority anywhere else, and the honest answer for any particular trust is the statute of the state whose law governs it.

It does nothing for the person who set the trust up. This is the load-bearing consumer point and it is the opposite of what the phrase suggests to most people. Montana's section 72-38-505(1), which most enacting states mirror, opens "whether or not the terms of a trust contain a spendthrift provision" and then provides that "during the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors," and that "with respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor's benefit." The opening words are doing the work: the settlor's creditors are not affected by the clause. A spendthrift provision is a tool for protecting somebody else, and a settlor who keeps the ability to benefit from the trust keeps the exposure that goes with it. Some states have legislated around that default for trusts a settlor creates for their own benefit, on conditions of their own. Section 166.040 of Nevada's Spendthrift Trust Act permits a spendthrift trust for the benefit of the settlor, but only where the writing "is irrevocable, does not require that any part of the income or principal of the trust be distributed to the settlor, and was not intended to hinder, delay or defraud known creditors." That is a different instrument with its own rules, and it is not what this page describes.

What it is genuinely good for. A beneficiary who cannot manage money, or who is in an occupation or a life stage that attracts claims. A beneficiary with a substance problem or a gambling problem, where the point is to prevent a lump sum being pledged away in advance. A young adult who would otherwise take an outright inheritance. A beneficiary receiving means-tested public benefits, where the design question is broader than the clause and belongs with the material on special needs trusts. In each case the clause is one line in a trust whose distribution standard, trustee choice and duration are doing most of the work.

1. The settlor's trust document includes a spendthrift provision, either in full terms or by using the statutory formula that a beneficiary's interest is held subject to a spendthrift trust.

2. The provision restrains both voluntary and involuntary transfer. If it restrains only one, it is not valid as a spendthrift provision.

3. The beneficiary cannot assign, sell or pledge their interest, and a purported assignment made in violation of a valid provision is ineffective.

4. A creditor or assignee cannot reach the interest, or a distribution, in the trustee's hands.

5. On receipt the protection ends. The distributed money is the beneficiary's, and is exposed to whatever the beneficiary is exposed to.

6. An exception creditor may still reach it, in a state whose act lists exceptions and to the extent it does.

A hypothetical, showing where the line falls. A trust holds $500,000 for Theo, with a valid spendthrift provision and instructions to distribute $3,000 a month. A former business partner obtains a judgment against Theo for $40,000.

The partner cannot attach the trust's $500,000, and cannot compel the trustee to pay the judgment, and cannot serve the trustee to intercept the monthly payment before it reaches Theo. What the partner can do is garnish Theo's bank account after each distribution lands. Over a year $3,000 × 12 = $36,000 passes through Theo's hands, and every dollar of it is reachable once it gets there. The clause has protected the principal and the future stream, and none of the money Theo actually received. Figures are illustrative, and whether the partner is an exception creditor is a question of the governing state's act.

Pros

• The trust principal and the beneficiary's future interest are out of reach of the beneficiary's ordinary creditors while the trustee holds them.
• The beneficiary cannot pledge or sell the interest, which forecloses the common route of borrowing against an expected inheritance.
• The statutory formula makes it cheap to include, so a routine family trust can carry the protection without bespoke drafting.
• It preserves the settlor's intent against events the settlor cannot foresee, which is the reason it exists.

Cons

• The protection ends the moment a distribution reaches the beneficiary, so a fixed distribution schedule leaks a predictable amount every period.
• It does nothing for the settlor's own creditors, whatever the clause says, and a settlor who can benefit from an irrevocable trust remains exposed to the amount the trustee could distribute to them.
• Exception creditors, typically including support and maintenance claims, can reach the interest anyway in states that have enacted the exceptions section.
• The rules are state law and genuinely differ, including on whether the exceptions section exists at all.
• Real protection usually requires a discretionary distribution standard and an independent trustee, which means giving the beneficiary less certainty, not just less exposure.
• The clause does not address means-tested public benefits, which need a different instrument.