Spendthrift Provisions in Trusts
provision? It is language contained within a revocable or irrevocable trust that limits the beneficiary’s legal rights concerning the trust assets. This restriction protects the trust property, and thus the beneficiary’s interest in the trust property, in two ways. It prevents a beneficiary from assigning or transferring away his or her interest in the trust, and it prevents the beneficiary’s creditors from compelling the trustee to make distributions from the trust to satisfy debts of the beneficiary.
A typical spendthrift provision in a trust may state as follows:
“No beneficiary may assign, anticipate, encumber, alienate, or otherwise voluntarily transfer the income or principal of any trust created under this trust. In addition, neither the income nor the principal of any trust created under this trust is subject to attachment, bankruptcy proceedings or any other legal process, the interference or control of creditors or others, or any involuntary transfer. This provision does not restrict a beneficiary’s right to disclaim any interest or exercise of any power of appointment granted in this trust.”
It is important to note that a grantor or creator of the trust cannot avoid creditors under Montana law by setting up a spendthrift trust for himself or herself. It only works when someone other than the grantor is the beneficiary, such as the grantor’s child who receives assets in trust upon the death of the grantor, or a special needs trust created by the grantor for the benefit of a disabled child. Also, as a matter of public policy, courts will not enforce spendthrift provisions to avoid certain obligations such as child support, alimony or spousal maintenance, back taxes and certain judgments.
A trust with a spendthrift provision will often be set up as a discretionary trust. This means that a trustee, which is the person or entity that acts as the manager of the trust, has total discretion on how and when to make distributions to the beneficiary. The trustee is in charge of the trust funds and pays 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, but may also disburse funds from the trust on behalf of the beneficiary to third-parties such as landlords, schools, etc. If and when the trustee does give trust money directly to the beneficiary, the beneficiary is then free to spend the disbursement however he or she wishes and, of course, the funds received by the beneficiary may also at that time be subject to being grabbed by creditors.