Top Law Schools

"Spendthrift restriction only applies as long as the property remains in the trust, and is inapplicable after it has been paid out to the beneficiary."

So generally, creditors or victims of tortious beneficiary of a spendthrift trust would have access to what exactly?

So if i were to write in the spendthrift provision that my son would receive $5,000/ month for the remainder of his life or something, but he owes like $50K to a creditor, he’d have to pay them approx. 10-12 months worth of the trust distribution minus any other support provision like “health, education, support” funds which is truly untouchable?

Obviously, i'm looking for a general explanation. Didn't study trusts during law school, so could use some help ironing out the confusion.

Thanks.

The creditors won't have access to the trust directly - they cannot compel the trustee to pay them anything after a judgment in their favor.

Once the money from the trust is distributed to the beneficiary, the 5,000, the creditors can then seek to have the beneficiary pay them. Creditors can reach the property/distribution once it's in the possession of the beneficiary.

If the money from the trust is specifically going towards necessities from the trust (i.e. Trust distribution paid by trustee for a specific bill), they wouldn't have access to that.

numbertwo88 wrote:The creditors won't have access to the trust directly - they cannot compel the trustee to pay them anything after a judgment in their favor.

Once the money from the trust is distributed to the beneficiary, the 5,000, the creditors can then seek to have the beneficiary pay them. Creditors can reach the property/distribution once it's in the possession of the beneficiary.

If the money from the trust is specifically going towards necessities from the trust (i.e. Trust distribution paid by trustee for a specific bill), they wouldn't have access to that.

This, although I think we read a case where a guy with a trust drove drunk and paralyzed someone and they let the person suing touch the actual principle of the trust despite a spendthrift provision. Generally the rule is though that creditors can't touch what's actually in the trust however.

A trust beneficiary may transfer their interest in the trust, meaning the beneficiary's interest is alienable. A spendthrift clause takes away the power and the right of the beneficiary to transfer the trust payout. So, without the spendthrift clause, a beneficiary could transfer their interest to the casino to satisfy a gambling debt. But a spendthrift clause prevents the beneficiary from doing this, thus protecting the trust property from many types of creditors.

The spendthrift clause has been modified by statute in many jurisdictions to allow piercing by those awarded spousal and child support, and by creditors who provide living necessities. Of course, the tax man can punch right through usually.

A discretionary trust is much more powerful to protect trust assets from creditors. Usually the tax man is powerless to access a discretionary trust.

LJ

Makes sense. Thanks all.

And re: that case "lawhopeful10," this guy does a great job of trying to explain the situation. Pretty sure this is the case you're talking about.

http://www.joshuakennon.com/moral-socie ... rt-claims/

kraeton wrote:Makes sense. Thanks all.

And re: that case "lawhopeful10," this guy does a great job of trying to explain the situation. Pretty sure this is the case you're talking about.

http://www.joshuakennon.com/moral-socie ... rt-claims/

Yea I think that was it. What an awful story. Guy was paralyzed, lost all sexual functions.

Another way to think of spendthrift provisions is that it is a way for the grantor to set up a trust to protect beneficiaries from themselves. As mentioned, if there is a spendthrift clause, then the beneficiary cannot transfer his/her interest (i.e. rights) to the distributions of the trust. Generally, a spendthrift clause must prevent both voluntary and involuntary transfers, however, this is an area of law that is very state specific. Check the wills/trusts/estates section of the state statutes as there will be a sections on spendthrift clauses there somewhere. It is fairly common that spendthrift clauses don't prevent access for child support, alimony, and mortgagees.