What is a Spendthrift Provision?
If you want to leave an inheritance to a loved one who struggles to manage their finances wisely, a spendthrift provision may be a useful estate planning tool. A “spendthrift” is a person who spends money in an extravagant, irresponsible way. By adding a spendthrift provision to your estate plan, you can help ensure that you leave an inheritance to your loved ones, and not their creditors.
What is a Spendthrift Provision?
First, what is a spendthrift provision? A spendthrift provision is a clause in a trust or will that limits the estate assets that can be reached by a beneficiary or their creditors. By including this provision in a trust, you can protect the beneficiary both from creditors and any debts they may otherwise seek to acquire based on their future inheritance.
A spendthrift provision states that any creditors of a beneficiary cannot attach (meaning gain a secured interest in) the trust assets as long as the assets remain in the trust. Once the beneficiary receives a payment from the trust, the creditor can seek repayment of the debt from that issued payment.
A spendthrift provision is often paired with a staggered distribution scheme that distributes the beneficiary’s inheritance in annual installments instead of a lump sum.
How a Spendthrift Provision Helps
Here’s an example of how a spendthrift provision helps. Let’s say you have a son to whom you’d like to leave an inheritance someday. But you know that your son has made poor financial decisions in the past due to a gambling addiction. He also doesn’t handle money well in general, and you worry that if he were to receive a large portion of your estate, he would quickly waste it.
Your estate planning attorney suggests that you include a spendthrift clause in your revocable living trust. This will prevent your son’s creditors from seeking payment for his debts directly from the trustee of your trust and from attaching an interest on his future distributions.
The provision also prohibits your son from assigning his future rights to payments from the trust. That means he can’t, for example, use his future inheritance to get credit to buy a luxury vehicle.
Finally, instead of leaving your son a lump sum distribution of your estate, you decide that your son will receive annual payments from the trust until he has received his full portion of your estate.
Spendthrift Provision Drawbacks
While a spendthrift provision and a stagged distribution can be useful tools, they’re not without drawbacks. If you opt to make annual distributions to a beneficiary, that means your trust will need to remain open for a number of years. It will likewise need to be managed by a trustee for an extended period of time.
This type of prolonged trust administration creates additional work and potential stress for your chosen trustee who will need to manage the trust and deal with the financially irresponsible beneficiary for a number of years. Keep this factor in mind when choosing whether to use a spendthrift provision and when selecting your trustee.
An experienced estate planning attorney can help you draft an estate plan that incorporates a spendthrift provision. If you have any questions about whether to use a spendthrift provision in your estate plan, please feel free to contact our law firm.
Law Offices of Daniel A. Hunt
The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.