What is a Spendthrift provision in a Trust?

Oftentimes I have clients come to me with the following scenario for estate planning: they love their child dearly and want the best for the child.  However, they have to acknowledge that their child does not make the best decisions in one portion of their life.  The problem could be financial: taking out plenty of debt and not paying it off, unable to maintain steady gainful employment, or merely not saving enough money.  Alternatively, the problem could be more personal: being with someone who is irresponsible with money, or who is merely taking advantage of them, or having difficulty with the law.  Lastly, there could be something that makes them disabled, and any money left outright could disrupt their benefits.  Whatever the case, the child cannot receive money, and that money has to be protected from that child.

Definition and Benefit of a Spendthrift clause

So, lets start of with the technical description of a spendthrift clause: “[A] Clause stopping the beneficiary’s creditor’s ability to collect benefits before they are received by the beneficiary” and “A condition in trusts barring one or more beneficiaries from pledging or spending benefits before they are received.”  Black’s law dictionary.

This is a two-part protection for your beneficiary.  First, your beneficiary’s interest in the Trust, either a Revocable or Irrevocable Trust, is protected from creditors.  If a creditor attempts to file a lawsuit to collect a debt using the Trust’s assets, then a court will reject the attempt.  The only times, under Virginia law, that a creditor has been successful in breaching a Trust in court with a validly designed Spendthrift provision is when the debt is either spousal support or child support.  In that case, there is an exemption carved out under Virginia law to provide for the support of the spouse and the child(ren).  Any other creditor has to go the long route of suing the beneficiary personally, securing a judgment for the amount owed, and then garnishing the income of the beneficiary – if the beneficiary can be garnished based on their income.

The second protection is more to protect the beneficiary from themself.  This protection prevents the beneficiary from selling their interest in the Trust or pledging the interest in the Trust as collateral for a loan.  This protection is particularly useful when the beneficiary is having an addiction problem, or they are in a relationship with someone who takes risky financial gambles that would likely involve any money that the beneficiary would receive.

An example of a standard Virginia spendthrift clause is as follows: “To the extent permitted by law, no beneficiary of any trust created hereunder shall have any right or power to anticipate, pledge, assign, sell, transfer, alienate or encumber his or her interest in the trust in any way, whether voluntarily or involuntarily; nor shall any such interest be liable for or subject to the debts, liabilities or obligations of such beneficiary or claims against such beneficiary, it being my intent that the interests of the beneficiaries hereunder be held subject to a spendthrift trust.”

The beneficiary can always attempt to break the spendthrift clause, but the likelihood of success tends to be small.  Also, the beneficiary can attempt to convince creditors to take their interest in the Trust.  However, any intelligent creditor would require a review of the Trust document.  This review can either be done by the creditor themself or, more likely, the creditor’s retained counsel.  The review inevitably causes the creditor to reject any agreement to take the beneficiary’s interest in the Trust as full or even partial collateral for the debt.

A spendthrift clause included in a Revocable, or Irrevocable, Trust always strengthens the protection for your beneficiaries.  Even if your beneficiaries are competent with the handling of money or have no personal issues whatsoever, knowing that creditors cannot arbitrarily take money that is supposed to go directly to the beneficiary always bring a peace of mind to the creators of the Trust.

It is highly advisable to discuss with a competent attorney when dealing with a Trust. Call our office today at 540-443-9255, or email at [email protected] to discuss your estate planning needs with an experienced estate planning attorney.