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Thursday, February 6, 2020

Is a Spendthrift Trust Provision Impenetrable by Creditors?

Estate plans often include a trust so heirs can avoid having to probate the will of a decedent. A trust can incorporate the protections of a spendthrift provision. The effect a court will give to the spendthrift provision is fact dependent, and caselaw gives us the following guidance.

Those who establish a trust are referred to as the settlors or donors. They can opt to name themselves also as beneficiaries. In doing so, the amount of assets they can access for themselves or for their benefit can be vulnerable to recovery by a creditor.

A spendthrift provision to protect assets from access by a beneficiary who has a mental health issue or addiction is to be handled with care. A detailed description in the wording regarding the application of monies should consider any special needs provisions in the trust and limit the application of the funds in amount and/or purpose in order to limit exposure to creditors.

When it comes to the divorce of a trust beneficiary, a prenuptial agreement is a better option. For parents who opt to incorporate a spendthrift provision as a means of protecting assets from a child’s divorce, it is important to know that the history of distributions in amount and purpose to or for the benefit of the child, as well as the indirect or direct benefit to the child’s spouse and their children, will be key considerations in the court’s determining if and the extent to which the trust benefits will be part of the divorce assets to be considered.

Daily tip: Take great care in the trust language including standards for distributions.





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