A spendthrift trust is a trust that it helps a beneficiary manage money by limiting how much money the beneficiary gets and by making the money unavailable to the beneficiary’s creditors.
When you create this type of trust, you ensure that the trustee retains tight control over the money in the trust. You can even direct the trustee to figure out the beneficiary’s income needs so that the trust only gives out the amount needed for living expenses.
In addition, you can arrange it so the beneficiary has no ability to give trust assets to creditors. The creditors have limited ways to collect debts from the beneficiary, because the money given to the beneficiary is very limited, and will probably be spent before the creditor comes looking for it.
There are, however, certain debts that must be paid from trust assets, even in a spendthrift trust, including:
- federal tax liens
- alimony and child support obligations
- a creditor who has an enforceable judgment from a court against the beneficiary (The creditor can collect up to 10% of the trust income until the judgment is paid.)
- if the trust income is more than the beneficiary needs for support, a creditor may be able to get a hold of the money through the courts
Legal Editor: Jill A. Kupferberg, April 2015
Changes may occur in this area of law. The information provided is brought to you as a public service with the help and assistance of volunteer legal editors, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or to substitute for the advice of a lawyer.