What is a Spendthrift Clause or Spendthrift Provision?
Rob Explains what is a spendthrift clauses or spendthrift provision does and how to implement it in a trust. Watch the Video and find examples of spendthrift clauses as you continued reading.
Today we’re talking about spendthrift clauses. They’re found in almost every trust ever done in the United States and in the English speaking world.
What I’m going to talk about is: what a spendthrift clause does, why they normally are irrelevant in traditional asset protection and how if you really knew the rules and really cared about it and everybody did, how I’d be out of business and a neat little trick that’ll help you.
First off, what is a spendthrift clause?
A spendthrift clause is a provision in a trust that prevents creditors of any beneficiary from touching the assets as long as they remain in the trust. It basically disenfranchises creditors completely even in bankruptcy. They’re recognized in all 50 States. They’re recognized in England.
They’re recognized in most of the English speaking world. They’re very effective and very powerful.
But why doesn’t a spendthrift clause just protect anybody all the time?
The reason is that spendthrift clauses do not help people who settle a self-trust themselves.
It’s called the self-settled rule. If you do a spendthrift clause or spendthrift trust clause and then settle the trust yourself, it’s considered irrelevant. You’re not permitted that easy out.
That’s why we do an asset protection trust. In most of the countries that actually utilize or have decent asset protection rules, we don’t even need to worry about the self-settled trust rule or the spendthrift clause protection because we don’t rely upon it.
But just remember, you can’t do it for yourself. You can do it for your kid. You can put a simple spendthrift clause in any trust you do for anybody else, it just can’t help you and they would put me out of business if properly used in most estate plans.
An Example of a Spendthrift Clause in an Asset Protection Trust
Ok look, let’s just say you’re going to inherit $100,000 from your parents. If they give you the money and
then you put it into trust, your trust doesn’t get the benefit of a spendthrift clause. Your trust is pierceable. Typical estate planning trust that can sometimes become a permanent after death oftentimes will give the beneficiary spendthrift provision, spendthrift protection if done correctly. It doesn’t work if you get the money out of trust. So, what do you do?
You always make sure that if you’re going to give somebody money, or if your parents are somebody who’s going to give you money; that they put it into trust and then allow you to become the trustee of your own trust when they die or when they want to make the gift. Rather than giving it to you outright and having you put into trust thereby making it so you can’t advantage of the spendthrift clause protection.
If they put it into a trust first and you just become trustee over your own trust, you’re double protected. You get the benefit of a spendthrift protection. I would be out of business. People would not need to do asset protection planning except in rare cases if everybody who willed or gave, excuse me, anybody who gave anybody any money, did so in trust and simply made the person to whom they’re giving the assets the trustee of this trust.
Now, I’m going to show you a sample clause, a very very simple one. This is a typical spendthrift clause. Let me read part of it to you. No discretionary beneficiary of this trust, including but not limited to the settlor, shall have the power to anticipate transfer, sell, basically, give the stuff away or encumber any payment or distribution of either principal or income. This is a lot of words.
I’ll let you see the whole thing. You can read it carefully on your own, but basically it says that your creditors are out of luck if they want to take any of the assets held in trust from you, very powerful provision.
I once saw a guy put a lot of money in trust for his teenage children. The oldest child went and bought a $400,000 Ferrari by promising the Ferrari dealer a portion of the proceeds he had in trust and proved that he had it in the trust. He took delivery of it and my client basically said, you’re not getting any money. The Ferrari dealer didn’t get paid.
My client’s son got to keep his money and that’s how it works. It basically disenfranchises creditors, and thank God for me because I wouldn’t have any asset protection work to do. Thank God for me. Most of you don’t take advantage of this when you will or giving the assets away – it doesn’t really work by will so well because you have to actually put into trust, but don’t forget the incredible power of the spendthrift clause.
You should put them in all asset protection trusts even though they don’t benefit you. If the trust is done correctly, it will benefit your beneficiaries, the people that survive you. They will have double protection, both from the asset protection aspects of the trust, and because of this simple little 150-word spendthrift clause. Don’t ever forget it. It’s a good thing to know about.
Typical Spendthrift Clause from Asset Protection Trust
(*The excerpt below is an actual example of a Spendthrift Clause from an example Asset Protection Trust)
No Discretionary Beneficiary of this Trust, including but not limited to the Settlor, shall have the power to anticipate, transfer, sell, assign or encumber any payment or distribution of either principal or income to be made under the provisions of this Trust. Any anticipation, transfer, sale, assignment or encumbrance by any such Discretionary Beneficiary, whether of principal or income, whether by voluntary act or by operation of law, shall be void and of no effect whatsoever. No distribution or payment shall be made by the Trustee to any creditor, assignee, receiver, referee in bankruptcy, or trustee in bankruptcy of any such Discretionary Beneficiary.
If, notwithstanding the above, it shall be held that the interest, whether of principal or income, of any Discretionary Beneficiary under this Trust, has vested in any third party, whether by voluntary transfer or by operation of law. To the extent of such vestment, such interest shall cease and the Trustee shall thereupon apply any payment or distribution, whether of income or principal, thus attempted to be sold, transferred, assigned, levied upon, or taken, to the use of the Discretionary Beneficiary who would have been entitled thereto in the absence of such sale, transfer, assignment, levy or taking.