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What is a Spendthrift Provision?

Spendthrift Provision

Definition– A spendthrift provision creates an irrevocable trust which prevents creditors from attaching the interest of the beneficiary in the trust before that interest is actually distributed to him. This protection exists only while property remains in the trust.

Spendthrift provisions are a standard part of a spendthrift trust, which is a trust that is created for the benefit of a person (often unable to control his spending) that gives an independent trustee full authority to make decisions as to how the trust funds may be spent or the benefit of the beneficiary. Creditors of the beneficiary are unable to reach the funds in the trust, and funds are not under the actual control of the beneficiary.

 

What It Really Means to Have a Spendthrift Provision

A spendthrift provision is put in place to protect the beneficiary from liability. If a beneficiary is protected by a spendthrift provision, it means that a creditor cannot attach their interest to the funds that belong to the beneficiary, so long as a distribution is not made to the beneficiary from the trust.  Once a distribution has been made, a creditor can attach their interest.

 

Example

Dave is the beneficiary of a trust that was set up by his parents to support him, which was funded with $500,000. Dave has a gambling addiction, and has racked up over $100,000 in gambling debts. Dave’s parents knew of his gambling addiction, and made sure to include a spendthrift provision within the trust. So long as a distribution of the trust funds is not made to Dave, his gambling creditors will be unable to attach their interest to the money within the trust to satisfy their debts.

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