What Is A Spendthrift Clause And How Does It Help My Family?

The subject of estate planning may be overwhelming for many people. Understanding the differences between wills and trusts and all of the various types of trusts can be confusing. You want to do what is best for you and for your family, and an experienced lawyer from the Boston law firm of Seder & Chandler, LLP, can help.

What Are Spendthrift Clauses?

A spendthrift clause is a provision in a trust - most trusts contain one - that prevents a trust beneficiary from using a future distribution to secure credit. The clause also prohibits payment to a creditor if it extends credit to a beneficiary based on future distributions. It may be easier to understand what they are by describing what they do.

How Can A Spendthrift Clause Help A Family Member?

A spendthrift clause in a trust can help protect family assets from creditors. The primary uses for spendthrift provisions include:

  • Setting up a trust for a family member who is unable to manage his or her finances appropriately
  • Protecting assets from the creditors of a beneficiary - even when that heir has a large amount of debt

Creditors of a beneficiary cannot attach - gain a secured interest in - the trust assets so long as the assets remain in the trust. They may pursue repayment for a debt from a trust beneficiary but only if the debt was incurred after the beneficiary received a payment from the trust.

For example, Papa Pete has assets that his son, Junior, will inherit one day. However, Junior has made financial mistakes in the past and doesn't handle his money too well. Pete decides he doesn't want all of the inheritance to be distributed to Junior in one lump sum - fearing that Junior will squander his fortune or that his creditors will take it all. Pete creates a trust containing a spendthrift clause, which pays Junior a set amount of money on an annual basis.

The spendthrift clause in the trust bars Junior's creditors from seeking payment for his debts directly from the trustee of Pete's trust and from attaching an interest on his future distributions. It also bars Junior from assigning his future rights to payments from the trust. This means that Junior cannot obtain credit - for buying a house or an expensive car, for example - by proving that he has money coming to him in the future.

Set Up Your Trust With The Help Of An Attorney

This cursory overview does not explain all of the benefits or requirements of spendthrift clauses. An estate planning lawyer can explain your options and help you draft a trust that will protect your family members.