Also known as: spendthrift provisions · spendthrift clause · spendthrift clauses · spendthrift trust · spendthrift protection
Written by attorneys — see sources below.
A term of a trust that restrains both voluntary and involuntary transfer of a beneficiary's interest. The provision bars the beneficiary from assigning the interest and prevents creditors from reaching it before distribution.
Santiago Sanchez created an irrevocable trust for his son Scott Summers. The instrument stated that Scott's interest shall not be anticipated or assigned by him or reached by his creditors. Scott later tried to pledge future distributions as collateral for a loan. The clause prevents both the voluntary pledge and any involuntary creditor attachment.
Sylvia Santos established a trust for her daughter Simone Sanders without any protective language. Simone owed a large judgment to Sterling Manufacturing. The court authorized the creditor to attach present and future distributions to Simone. The lack of restraint left the interest reachable by ordinary creditor remedies.
Sean Steele funded a trust for his niece Sierra Santos. The instrument prohibited both assignment by Sierra and seizure by her creditors. Sierra attempted to sell her interest to a third party while a judgment creditor sought attachment. The clause satisfied the dual-restraint standard and blocked both actions.
Stonehaven Properties created a trust for beneficiary Scott Summers. The document declared that Scott's interest was held subject to a spendthrift trust. Scott tried to transfer the interest to satisfy a personal debt. The phrasing of similar import validly restrained both voluntary and involuntary transfers.
Synergy Systems established a discretionary trust for Sylvia Santos. The trustee had sole discretion over distributions for support. A tort creditor obtained a judgment against Sylvia and sought to compel payment. The spendthrift provision prevented the creditor from forcing any distribution despite the judgment.
Santiago Sanchez participated in an ERISA-governed plan that contained spendthrift language. After his death his spouse attempted to divert benefits through a testamentary transfer. A creditor of the spouse sought to enforce a judgment against the plan benefits. The plan's protective terms blocked the diversion under federal preemption rules.
Isaac Boggs began working for South Central Bell in 1949 and remained employed until his retirement in 1985. He was married to Dorothy Boggs from 1949 until her death in 1979, and the couple had three sons. After Dorothy died, Isaac married Sandra Boggs in 1980, and they remained married until Isaac's death in 1989. Upon retirement, Isaac received a lump-sum distribution of $151,628.94 from the Bell System Savings Plan, which he rolled over into an Individual Retirement Account worth $180,778.05 at his death. He also received 96 shares of AT&T stock from the Bell South Employee Stock Ownership Plan and a monthly annuity of $1,777.67 from the Bell South Service Retirement Program. Dorothy's will bequeathed one-third of her estate to Isaac outright along with a lifetime usufruct in the remaining two-thirds, with naked ownership passing to the sons. A 1980 Louisiana judgment of possession ascribed to Dorothy's estate a community property interest in Isaac's Savings Plan account valued at $21,194.29. After Isaac's death, Sandra began receiving a survivor annuity and other benefits. The sons filed suit in Louisiana state court claiming a portion of the retirement benefits under Dorothy's will and Louisiana community property law. Sandra then filed a declaratory judgment action in the United States District Court for the Eastern District of Louisiana asserting that ERISA preempts the sons' claims. The District Court granted summary judgment against Sandra. The Fifth Circuit affirmed. The Supreme Court granted certiorari.
A clause stating that the beneficiary's interest shall not be anticipated, assigned, or reached by creditors restrains both voluntary and involuntary transfers. Words of similar import such as declaring the interest held subject to a spendthrift trust also suffice. The provision must address both categories of restraint to be valid.
Supporting sources
…logic would even permit a spouse to transfer an interest in a pension plan to creditors, a result incompatible with a spendthrift provision such as § 1056(d)(1). Community property laws have, in the past, been preempted in order to ensure the implementation of a federal statutory scheme. See, e. g. , McCune v. Essig , 199 U.…
…a beneficiary had effectively assigned income from a trust. In prior tax litigation, a federal court held that the
…attach to each of those interests." 461 U. S., at 703, n. 31; cf. Drye, supra , at 60, n. 7 (noting that "an interest in a spendthrift trust has been held to constitute "property" for purposes of § 6321' even though the beneficiary may not transfer that interest to third parties"). Excluding property from a federal tax lien…
…v. United States , 80 F. 3d 173, 176 (CA6 1996) (“Federal law did not create [the taxpayer’s] equitable income interest [in a spendthrift trust], but federal law must be applied in determining whether the interest constitutes ‘property’ for purposes of § 6321.”); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. , 790 F. 2d…
…had the effect of forcing such payments and thereby dissolving the trust established for her protection
A valid spendthrift provision prevents a creditor from reaching the beneficiary's interest or distributions before the trustee delivers them to the beneficiary. Once the beneficiary actually receives a distribution the funds become subject to ordinary creditor remedies. The provision does not protect assets already in the beneficiary's possession.
Supporting sources
State law creates an exception allowing a child, spouse, or former spouse with a support judgment to reach distributions even when a spendthrift provision is present. The court may order the trustee to pay an equitable amount not exceeding what a proper exercise of discretion would have allowed. General creditors remain barred by the provision.
Supporting sources
A creditor may not compel a distribution subject to the trustee's discretion even if the trust contains a spendthrift provision. The protection applies whether the discretion is expressed as a standard or is absolute. An exception exists only for certain support claims when the trustee has failed to comply with the standard or has abused discretion.
Supporting sources