Provision Spotlight: the Spendthrift Clause

Let’s discuss one of the special powers which a trust can grant to the trustee – the power to frustrate a beneficiary’s creditors. Most of the trustee’s powers are pedestrian albeit important, such as the power to move the situs (legal location) of a trust in order to save on taxes or accommodate new family circumstances. But there are some occasions that call for more extraordinary powers, such as when a beneficiary gets hopelessly into debt and they do not have the wherewithal to manage it on their own.

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We call the beneficiary who gets themselves into a large amount of debt the spendthrift. The spendthrift is a responsible and competent adult, and it wouldn’t be fair to make his or her near blood relations share in the burden of their debt, at least not out of the trust principal, for goodness’ sake. In short, perhaps the spendthrift’s family feels that the spendthrift should bear the burden of settling their debt with the creditors.

The spendthrift clause short-circuits the rights of the spendthrift’s creditors by prohibiting the trustee from distributing principal or income of the trust when it will be invaded by creditors of the spendthrift. Even when the distribution is mandatory, a trustee may suspend distributions in their sole discretion to a particular beneficiary and thereby frustrate the spendthrift’s creditors. My trusts do make provision for the trustee to make distributions for the health, education, maintenance and support of the beneficiary, however, so the beneficiary doesn’t go hungry at night as a result of a mere contractual provision. I suggest to you it would be inhumane to do otherwise!

The protections of a spendthrift clause are available to any family with the time and the inclination to create an estate plan. Contact me today and we can implement a plan that makes sense for your family at a reasonable rate.

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Misha is an estate planning attorney for his firm, Speedwell Law, PLLC. If you would like assistance in setting up your own estate plan, Misha can be reached at (703) 553-2577 or [email protected].

This post, including any of its contents or links, is not intended to provide you with legal advice. It provides personal perspectives on legal news and developments. Reading this post, leaving a comment, or communicating with its author by email or over the Internet does not create any attorney-client relationship.