What is a Spendthrift Trust?
As parents, we all do our best to instill our good values in our children. But sometimes, despite all our guidance, our children make poor personal and financial decisions.
Their poor judgment may be due to a lack of maturity that is temporary. Or it may be due to a long-term problem stemming from alcohol and drug abuse or another addiction. Whatever the reason, you know that they will squander any hard-earned money you leave to them when you die within a short amount of time.
But does this mean that you should disinherit your spendthrift child? Not at all. If you would like to give assets to a loved one but are concerned about their lack of judgment, a spendthrift trust may be the solution.
What is the benefit of a Spendthrift Trust?
A spendthrift trust is a trust created for a beneficiary that prohibits the beneficiary from selling, giving away, or otherwise transferring the beneficiary’s interest in the trust assets. This prevents the beneficiary’s creditors from reaching the beneficiary’s interest in the trust.
Rather than distributing property outright, the creator of the trust (the settlor) appoints a trustee to manage trust assets for the beneficiary. The beneficiary’s creditors can reach assets that the trustee has already distributed to the beneficiary. But with few exceptions, creditors cannot compel the trustee to pay outstanding claims from assets that remain in the trust.
How Does One Create a Spendthrift Trust?
Creating a spendthrift trust is easy. The Texas Estates Code only requires language showing that the settlor of the trust intends for it qualify as a spendthrift trust. Simply saying “this is a spendthrift trust” is sufficient. No other special language is required.
Does the Beneficiary have to be a Spendthrift?
There is no prerequisite that the settlor proves the beneficiary is actually incapable of managing his or her money. You can create a spendthrift trust for anyone, even a responsible adult beneficiary!
In fact, you can even permit a beneficiary to serve as Trustee of their own trust either immediately if they are already responsible adults, or sometime in the future when they will have attained an age or maturity to manage their own trust.
As a result, most trusts include spendthrift provisions as an extra layer of protection for the trust’s beneficiaries.
Sounds Great! Can I Create One for Myself?
All of us would like to protect our assets from attachment by creditors; however, Texas considers self-settled spendthrift trusts against public policy. A spendthrift provision does not invalidate a trust but also does not protect the trust assets from creditors.
Note, however, the Texas legislature made some changes to the Texas Property Code that seems to have created a back door to a self-settled asset protection trust. For more information read: Did Texas Create a Back Door for a Self-Settled Asset Protection Trust?
Do you have a loved one who makes bad personal and financial decisions? Or would you like to give your adult beneficiaries an extra layer of asset protection. If so, a spendthrift trust can help you provide for him or her while ensuring that the assets you’ve worked hard to accumulate your whole life are not squandered away or exposed to the claims of creditors.
Click on the link to learn more about creating a Trust in Texas –>
This article was originally published on November 28, 2012, and updated on May 18, 2021.