Also known as: spendthrift provision · spendthrift clause · spendthrift clauses · spendthrift trust
Written by attorneys — see sources below.
A term of a trust that restrains both voluntary and involuntary transfer of a beneficiary's interest. Such a provision is valid only when it blocks assignment by the beneficiary and attachment by creditors before distribution.
Skylar Sullivan creates an irrevocable trust for her nephew Simon Stern and includes a clause stating that Simon's interest is held subject to a spendthrift trust. When Simon attempts to sell his future distributions to a third party, the trustee refuses the assignment because the clause restrains voluntary transfer. The restraint prevents Simon from conveying his interest before the trustee makes any payment.
Samantha Stone is the beneficiary of a trust funded by her grandmother that contains no spendthrift language. Summit Bank obtains a judgment against Samantha and asks the court to attach future trust distributions. Because the trust lacks a spendthrift provision, the court authorizes the bank to reach Samantha's interest through attachment of distributions.
Solomon Silver's trust instrument states only that his interest is inalienable by him. When a judgment creditor seeks to attach distributions, the court holds the clause ineffective because it fails to restrain involuntary transfers as well. The spendthrift provision is therefore invalid under the requirement that both types of transfer must be blocked.
Sophia Singh's trust directs that her interest is held subject to a spendthrift trust. When Sophia tries to pledge future income to a lender, the trustee declines because the language is sufficient to restrain both voluntary and involuntary transfers. The clause therefore protects the distributions until they reach Sophia.
Sarah Sullivan is the beneficiary of a trust giving the trustee sole discretion to distribute income, and the instrument includes a spendthrift provision. A judgment creditor of Sarah demands that the trustee be compelled to make distributions to satisfy the debt. The court refuses because a creditor may not compel a discretionary distribution even when a spendthrift clause is present.
Simon Stern's spouse dies leaving an ERISA-qualified pension interest subject to a state-law spendthrift provision. After the spouse's death, creditors attempt to reach the undistributed benefits under state trust rules. The Supreme Court holds that ERISA's anti-alienation rules control and prevent the state spendthrift provision from being overridden by competing claims.
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.
View caseA clause stating that the beneficiary's interest is held subject to a spendthrift trust, or words of similar import, is enough to restrain both voluntary and involuntary transfers. The provision must block assignment by the beneficiary and attachment by creditors before the trustee distributes the assets.
Supporting sources
A valid spendthrift provision prevents a creditor from reaching the beneficiary's interest or compelling distributions before the trustee pays the beneficiary. Creditors remain barred even if the trustee has discretion or applies a distribution standard.
Supporting sources
No. During the settlor's lifetime, creditors of a settlor who retains a power to revoke may reach assets in a revocable trust regardless of any spendthrift language. The same rule applies to the maximum amount distributable to the settlor from an irrevocable self-settled trust.
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.…