An irrevocable spendthrift trust is a type of trust that either limits or altogether prevents a beneficiary from transferring or assigning his or her interest in the income or the principal of the trust. Thus, a creditor cannot reach a beneficiary’s interest because a beneficiary has no right or ability to transfer his or her interest in the assets of a spendthrift trust. However, after a distribution is made to the beneficiary, that distribution can be reached by a creditor, except to the extent the distributed property is used to support the beneficiary. If a trust calls for a distribution to the beneficiary, but the beneficiary refuses such distribution and elects to retain property in the trust, the spendthrift protection of the trust ceases with respect to that distribution and the beneficiary’s creditors can now reach trust assets.
Self-Settled Trusts: There are exceptions to the protection provided by a spendthrift trust. For example, if the settlor of a trust is also a beneficiary, then the settlor’s interest in the trust assets will not be protected by the trust’s spendthrift clause. However, a non-settlor-beneficiary’s interest in the trust assets would remain asset protected by the spendthrift clause.
The prohibition against self-settled trusts in California is well-settled. Consequently, a self-settled trust must be established in a jurisdiction, like Delaware, Alaska and Nevada, and certain foreign nations, like Saint Vincent and the Grenadines and the Cook Islands. Forming an irrevocable trust in one of these jurisdictions may be another way to preserve the protection of the spendthrift clause of a self-settled trust.
Public Policy & Support Payments: Even if an irrevocable trust has a spendthrift clause, a court may order the trustee to satisfy a beneficiary’s support obligation to a former spouse or minor child out of any distributions that the trustee has decided, in his or her discretion, to make to the beneficiary.
This is an example of two conflicting public policy rationales. Spendthrift clauses have been enforceable, historically, because our society places a great deal of importance on private property rights. Consequently, creditors cannot generally reach a beneficiary’s interest in a spendthrift trust. However, our society places an even greater importance on satisfying support obligations, and even a spendthrift trust will not likely shield a beneficiary from these obligations.
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