A spendthrifttrust is any trust that contains clauses specifically aimed at preventing the beneficiaries from squandering their inheritance. People who want to leave substantial amounts of money to their adult children or grandchildren—but don’t trust them to manage it wisely—often use spendthrift trusts.
Spendthrift Provisions in a Trust
The trust prohibits the beneficiaries (the people who benefit from the trust) from spending or borrowing against the trust funds. Spendthrift language is also intended to prevent creditors from going after trust funds to pay what a beneficiary owes them. To be effective, the trust must contain very specific language. Here’s a typical spendthrift provision you might find in a document creating such a trust:
Spendthrift Provisions in a Trust
The trust prohibits the beneficiaries (the people who benefit from the trust) from spending or borrowing against the trust funds. Spendthrift language is also intended to prevent creditors from going after trust funds to pay what a beneficiary owes them. To be effective, the trust must contain very specific language. Here’s a typical spendthrift provision you might find in a document creating such a trust:
Except as otherwise provided in this trust agreement, all principal or income that is payable, or will become payable, to the beneficiary of any trust created by this agreement shall not be subject to anticipation, assignment, pledge, sale, or transfer in any manner. No beneficiary shall have the power to anticipate or encumber any such interest. No such interest, while in the possession of the trustee, shall be liable for, or subject to, the debts, contracts, obligations, liabilities, or torts of any beneficiary. Such interests shall also be free from any claim, control, or interference of the spouse of a married beneficiary, or the parent of a beneficiary.
The statutes of many states recognize spendthrifttrusts, and say that spendthrift provisions are valid to prevent both “voluntary and involuntary” transfers of the beneficiary’s interest in the trust. In other words, the beneficiary can’t spend or pledge the trust money, and creditors can’t seize it. (For example, see Ga. Code Ann. § 53-12-80.)
You can’t stiff creditors by setting up a spendthrifttrust for yourself. It only works when you name someone else as the beneficiary.
Debts a SpendthriftTrust Can’t Avoid
It isn’t possible to lock up trust assets entirely. Under most states’ laws, assets held in trust must be used to pay certain kinds of obligations, including child support, support of a spouse or former spouse, and debts incurred for necessities of life, such as food or shelter. Government claims may also be enforceable against trust assets.
Debts a SpendthriftTrust Can’t Avoid
It isn’t possible to lock up trust assets entirely. Under most states’ laws, assets held in trust must be used to pay certain kinds of obligations, including child support, support of a spouse or former spouse, and debts incurred for necessities of life, such as food or shelter. Government claims may also be enforceable against trust assets.
For example, a Delaware woman went to court seeking the spousal support due her under a separation agreement with her husband, who was the beneficiary of a spendthrift trust. The court concluded that she was not a “creditor” as defined in the state statute allowing spendthrifttrusts, and that she was entitled to funds from the trust to pay her what she was owed. (Garretson v. Garretson, 306 A.2d 737, Del. 1973.)
State law may also put a limit on the amount of money that can be protected from creditors. For example, in Oklahoma, creditors can take any income from trust property that exceeds $25,000 per year. (Okla. Stat. Ann. § 175.25.) But only a very large trust would generate $25,000 of income in a year.
State law may also put a limit on the amount of money that can be protected from creditors. For example, in Oklahoma, creditors can take any income from trust property that exceeds $25,000 per year. (Okla. Stat. Ann. § 175.25.) But only a very large trust would generate $25,000 of income in a year.
The Trustee’s Role
The trustee is in charge of the trust funds and doles them out according to the terms of the trust. A trustee may make payments directly to the beneficiary, if the trust allows or requires it. A trust document may direct the trustee to release all or part of the spendthrifttrust funds to a beneficiary at a certain date or event—for example, when the beneficiary turns 25 or graduates from college. In that case, the trustee must follow the terms of the trust and turn over the money, even if it seems very likely that the beneficiary will promptly lose it.
With a spendthrifttrust that is designed to keep money out of the hands of an improvident beneficiary, however, it’s likely that most of the disbursements will be made to others—schools, landlords, and so on—on the beneficiary’s behalf. If the trustee does give trust money directly to beneficiaries, they are free to spend it however they wish.
CREATION OF A NEVADA SPENDTHRIFT TRUST:
NRS 166.040 Competency of settlor; writing required; circumstances when writing meets requirements for trust to be created for benefit of settlor; settlor’s ability to hold other powers.
NRS 166.040 Competency of settlor; writing required; circumstances when writing meets requirements for trust to be created for benefit of settlor; settlor’s ability to hold other powers.
1. Any person competent by law to execute a will or
deed may, by writing only, duly executed, by will, conveyance or other writing,
create a spendthrift trust in real, personal or mixed property for the benefit
of:
(a) A person other than the settlor;
(b) The settlor if 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;
or
(c) Both the settlor and another person if the writing
meets the requirements of paragraph (b).
2. For the purposes of this section, a writing meets
the requirements of paragraph (b) of subsection 1 even if under the terms of
the writing:
(a) The settlor may prevent a distribution from the
trust;
(b) The settlor holds a special lifetime or testamentary
power of appointment that cannot be exercised in favor of the settlor, the
settlor’s estate, a creditor of the settlor or a creditor of the settlor’s
estate;
(c) The settlor is a beneficiary of a trust that
qualifies as a charitable remainder trust pursuant to 26 U.S.C. § 664, or any
successor provision, even if the settlor has the right to release the settlor’s
retained interest in such a trust, in whole or in part, in favor of one or more
of the remainder beneficiaries of the trust;
(d) The settlor is authorized or entitled to receive a
percentage of the value of the trust each year as specified in the trust
instrument of the initial value of the trust assets or their value determined
from time to time pursuant to the trust instrument, but not exceeding:
(1) The amount that may be defined as income
pursuant to 26 U.S.C. § 643(b); or
(2) With respect to benefits from any qualified
retirement plan or any eligible deferred compensation plan, the minimum
required distribution as defined in 26 U.S.C. § 4974(b);
(e) The settlor is authorized or entitled to receive
income or principal from a grantor retained annuity trust paying out a
qualified annuity interest within the meaning of 26 C.F.R. § 25.2702-3(b) or a
grantor retained unitrust paying out a qualified unitrust interest within the
meaning of 26 C.F.R. § 25.2702-3(c);
(f) The settlor is authorized or entitled to use real
property held under a qualified personal residence trust as described in 26
C.F.R. § 25.2702-5(c), and any successor provision, or the settlor may possess
or actually possesses a qualified annuity interest within the meaning of that
term as described in 26 C.F.R. § 25.2702-3(b), and any successor provision;
(g) The settlor is authorized to receive income or
principal from the trust, but only subject to the discretion of another person;
or
(h) The settlor is authorized to use real or personal
property owned by the trust.
3. Except for the power of the settlor to make
distributions to himself or herself without the consent of another person, the
provisions of this section shall not be construed to prohibit the settlor of a
spendthrift trust from holding other powers under the trust, whether or not the
settlor is a cotrustee, including, without limitation, the power to remove and
replace a trustee, direct trust investments and execute other management
powers.
4. As used in this section, “remainder beneficiary” has
the meaning ascribed to it in NRS 164.785.
[2:86:1939; 1931 NCL § 6880.01]—(NRS A 1999,
1236; 2007,
894; 2009,
801; 2011,
1480)
NRS 166.045 Powers
of settlor. The settlor of a spendthrift trust
has only those powers and rights that are conferred to the settlor by the trust
instrument. An agreement or understanding, express or implied, between the
settlor and the trustee that attempts to grant or permit the retention of
greater rights or authority than is stated in the trust instrument is void.
(Added to NRS by 2011,
1480)
NRS 166.050 No
specific language necessary for creation of trust. No
specific language is necessary for the creation of a spendthrift trust. It is
sufficient if by the terms of the writing (construed in the light of this
chapter if necessary) the creator manifests an intention to create such a
trust.
[3:86:1939; 1931 NCL § 6880.02]
