05 Dec How Spend thrift Trust Provisions Aid in Asset Protection
A spend thrift provision in a trust prohibits the transfer of a beneficiary’s interest in the trust before distribution of the interest to the beneficiary. For example, it might be used by a parent to prevent the trustee from paying off creditors for a young person’s foolish spending. The majority of States allow for spend thrift trusts; however, if the beneficiary is also a settlor (contributor) to the trust, a spend thrift provision will not protect the beneficiary’s contributions to the trust, except in states with special Self-Settled Trust (also called Domestic Asset Protection Trusts, or “DAPTs”) legislation.
Spend thrift provisions generally have been interpreted as follows.
A beneficiary’s interest in a trust with valid spend thrift provision cannot be reached by creditors, including creditors in a bankruptcy proceeding.
Even if the beneficiary has a definite interest in the trust, such as a right to receive a distribution of all income, creditors cannot reach anything that the beneficiary cannot assign, unless and until it is distributed or required by the trust agreement to be distributed.
A creditor cannot compel a trustee to make a discretionary distribution; however, if the beneficiary has the right to demand an immediate distribution from the trust, then a spend thrift provision will not prevent the beneficiary’s creditors from reaching the property subject to that right of withdrawal.
States differ considerably in allowing exceptions for spend thrift protection. Protections allowed variously by states include: (1) alimony (2) child support (3) taxes (4) governmental claims (5) tort judgments (only Georgia) (6) judgments for restitution as a result of a criminal conviction of the beneficiaries and (7) judgments for necessaries.
Mandatory Distributions Compared to Discretionary Distributions
Typically, spend thrift statutes give priority creditors a legal remedy to make claims on distributions from the trust to the beneficiary from mandatory distributions to the beneficiary. However, if the trust instrument provides only for purely discretionary distributions and the trustee elects to withhold distributions, the beneficiary, and thus the creditor, will not have an enforceable right to distributions.
What if the Spend thrift Trust Provides that the Trustee Shall Make Distributions as He Deems Necessary for the Beneficiary’s Support?
Instances where a trustee may make distributions as he deems necessary for the beneficiary’s support have created many court battles. And likely the result will vary from state to state and trust to trust. For example: What if the creditors are the beneficiary’s child and ex-spouse seeking to collect alimony and child support? In some states, the result may be determined by whether or not the distributions are necessary to meet mandatory alimony and child support.
And, there are more potential issues. Can distributions be compelled if the spend thrift trust provides for both discretionary and non-discretionary distributions? Some cases have allowed the creditor a claim only against money coming into the beneficiary’s possession. In others, the creditor has been satisfied only when he had could demonstrate an enforceable right to distributions or a remainder interest. Drafting attorneys have an obligation to obtain predicable results in keeping with the settlor’s wishes.