Spendthrift provisions are often mentioned by estate planning professionals. Spendthrift language generally appears in a trust (though these provisions can be used in wills that create trust interests). Typically, they prevent a trust beneficiary from “alienating” his/her interest in the trust. Why does this matter? It prevents the beneficiary from giving their trust interest away or pledging it against debts. This provides protection from creditors. 

 

        Most estate planning clients will benefit from spendthrift planning, but beneficiaries who are known to be bad with money should definitely be protected in this way. However, keep in mind that some states refuse to recognize spendthrift provisions. These states argue that spendthrift clauses are against public policy – because the state has an interest in guaranteeing that individuals pay their debts. So, if you are planning a move across state lines, make sure that your estate plan follows the spendthrift rules of your new home.

 

        While the benefits are obvious, there are limitations to these provisions. Specifically, spendthrift provisions only protect assets while they are in the trust. Once assets have been paid to the beneficiary, the beneficiary has full ownership of the assets and the protections dissolve. There are also some common exceptions to spendthrift provisions that are worth understanding. These provisions will not be applicable in a self-settled trust (i.e. a trust made for the benefit of the trust creator). Also, spendthrift provisions will not block a creditor seeking child support or alimony. Creditors looking to enforce tort claims (typically civil lawsuits) may also pierce spendthrift provisions.

       

         For these reasons, spendthrift provisions can be a savvy addition to an estate plan. However, keep in mind that they are not fool-proof and can only do so much.