What is a Spendthrift Trust?

by Rania Combs on November 28, 2012

As parents, we all do our best to instill our good values in our children. But sometimes, despite all our guidance, our children make poor personal and financial decisions.

Their poor judgment may be a due to a lack of maturity that is temporary, or perhaps a long-term problem stemming from alcohol and drug abuse or another addiction. Whatever the reason, you know that any hard-earned money you leave to them outright in an inheritance would be gone within a short amount of time.

But does this mean that you should disinherit your spendthrift child? Not at all. If you would like to give assets to a loved one but are concerned about their lack of judgment, a spendthrift trust may be the solution.

What is a Spendthrift Trust?

A spendthrift trust is a trust created for the benefit of a beneficiary that prohibits the beneficiary from selling, giving away or otherwise transferring his or her interest in the trust assets, and prevents the beneficiary’s creditors from reaching the beneficiary’s interest in the trust.

What is the benefit of a Spendthrift Trust?

Rather than being held outright, the trust assets are managed by a trustee who controls the assets after you have died. The beneficiary’s creditors can reach assets that the trustee has already distributed to the beneficiary. But with few exceptions, as long as the assets remain in the trust, creditors cannot reach the assets or compel the trustee to pay any outstanding claims.

How Does One Create a Spendthrift Trust?

Creating a spendthrift trust is easy. The Texas Probate Code requires only that the trust include language showing that the grantor or settlor of the trust intended it to qualify as a spendthrift trust. Simply saying “this is a spendthrift trust” is sufficient. No other special language is required.

Can a Spendthrift Trust be Created for Anyone?

There is no prerequisite that the grantor or settlor of a trust prove that the person for whom the spendthrift trust is created is actually incapable of managing his or her money. As a result, most trusts include spendthrift provisions as an extra layer of protection for the trust’s beneficiary against possible lawsuits.

Sounds Great! Can I Create a Spendthrift Trust for Myself?

All of us would like to protect our assets from attachment by creditors, but self-settled spendthrift trusts are against public policy. A spendthrift provision does not invalidate a trust, but also does not protect the trust assets from creditors.

The obvious reason for this rule is to prevent unscrupulous people trying to defraud creditors. Therefore, if the settlor is also a beneficiary of a trust, a spendthrift provision does not prevent his or her creditors from satisfying claims from the trust assets.

Do you have a loved one who makes bad personal and financial decisions? If so, a spendthrift trust can help you provide for him or her while ensuring that the assets you’ve worked hard to accumulate your whole life are not squandered away.

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