Also known as: spendthrift restrictions · spendthrift clause · spendthrift provision
Written by attorneys — see sources below.
A term of a trust that restrains both voluntary and involuntary transfer of a beneficiary's interest.
Sebastian Santos creates a trust for his daughter Sierra Santos and includes language stating that her interest cannot be assigned or reached by creditors. When Sierra attempts to pledge her future distributions as collateral for a personal loan, the trustee refuses the assignment because the clause prevents voluntary transfer of the interest.
Solomon Silver is the beneficiary of a trust funded by his uncle. A judgment creditor seeks to attach future distributions to satisfy an unpaid debt. Because the trust contains a spendthrift restriction, the court denies the attachment and limits the creditor to other collection methods outside the trust.
Sarah Sullivan receives income from a trust whose instrument states only that her interest cannot be assigned by her. A creditor obtains a court order attaching distributions because the clause restrains only voluntary transfer and therefore fails the requirement to restrain both voluntary and involuntary transfers.
Scott Summers is the beneficiary of a discretionary trust that includes a spendthrift restriction. His judgment creditor attempts to compel the trustee to make distributions to satisfy the debt. The court refuses the request because the creditor cannot force discretionary distributions even when a spendthrift restriction is present.
Samantha Stone is the beneficiary of a trust containing a spendthrift restriction. A federal tax lien is asserted against her interest. The restriction yields to the federal claim under governing federal law that permits collection despite the trust term.
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 spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary's interest. Language stating that the interest is held subject to a spendthrift trust is sufficient to achieve this restraint.
Supporting sources
A creditor generally cannot reach a beneficiary's interest or distributions before receipt when a valid spendthrift provision exists. Once a distribution is made to the beneficiary, however, the funds become subject to ordinary creditor remedies.
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A creditor may not compel a distribution subject to the trustee's discretion even if the trust contains a spendthrift provision. This protection applies whether or not the discretion is guided by a standard of distribution.
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A spendthrift provision does not shield assets in a revocable trust from the settlor's own creditors during the settlor's lifetime. The retained power to revoke means creditors may reach the trust property regardless of the restriction.
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…Grantor’s said son shall take and receive, per stirpes and not per capita , one equal share thereof absolutely.” There is a spendthrift provision for both principal and income, applicable after the death of the grantor, and it is also provided that the Trustee shall have authority to receive any other funds granted, devised, or…