What is a Spendthrift Trust?

Malcolm Tatum

Spendthrift trusts are a type of trust arrangement that seeks to control the spending of the recipient of the funds contained within the trust. Benefactors often make use of a spendthrift clause within the trust agreement that appoints an administrator or trustee who then has the responsibility of determining when and how funds will be withdrawn from the trust account. This arrangement helps to ensure that the beneficiary receives long-term financial support from the spendthrift trust, rather than having the opportunity to seize control of the inheritance and possibly lose it all in short period of time.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The inclusion of a spendthrift clause in different types of wills and trusts is not unusual. Parents often make this arrangement in their estate planning as a means of providing for children until they reach a certain age. For example, the spendthrift trust may be structured so that an administrator utilizes trust income to pay each child’s education, while also providing the child with a monthly living allowance. Upon reaching the age of twenty-five or thirty, the child is allowed to assume control of the trust and manage the assets of the trust in any way he or she sees fit.

A spendthrift trust also provides a degree of protection from creditors. Depending on local laws and regulations, a creditor may not be able to attach or place a lien on trust assets as a means of collecting on delinquent debt. These same provisions also protect the beneficiary in the event that he or she is sued and a judgment is declared against him or her. In many jurisdictions, the judgment creditor is not able to touch the trust itself, although there are situations where local laws permit the trust to make monthly payments on the judgment, with the funds being withheld from the monthly allowance normally paid to the beneficiary.

There are other situations where some jurisdictions will also allow the trust to make direct monthly payments to an entity other than the beneficiary. Child support and alimony payments are one example. Upon the granting of a divorce, it is possible that the court may order the trust administrator to withhold a portion of the monthly allowance of the beneficiary. Those funds are redirected to pay the court-ordered alimony to the former spouse, as well as monthly child support payments to the custodial parent.

The primary purpose of creating a spendthrift trust is to ensure that the beneficiary has a steady stream of income over an extended period of time. Some parents go as far as establishing a family corporation, arranging the estate so that it will provide each child with a monthly allowance for as long as the child is alive. While there are other ways to arrange estates and provide financial care for loved ones over the long term, a spendthrift trust remains one of the most effective and most practical strategies.

Discuss this Article

Post your comments
Forgot password?