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Spendthrift Provisions

Spendthrift Provisions. Definition -- § 112.035. A provision which typically prohibits: Beneficiary from transferring right to future payments of income or principal. Beneficiary’s creditors from subjecting the beneficiary’s interest to the payment of their claims. Purposes.

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Spendthrift Provisions

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  1. Spendthrift Provisions

  2. Definition -- § 112.035 A provision which typically prohibits: • Beneficiary from transferring right to future payments of income or principal. • Beneficiary’s creditors from subjecting the beneficiary’s interest to the payment of their claims.

  3. Purposes • Protect beneficiary (asset protection). • Allow settlor to have trust property used as settlor intended. • Note: No requirement that beneficiary “needs” protection.

  4. Time of protection • Interest protected only while in the trust. • Once trustee pays beneficiary, beneficiary may transfer and creditors may reach.

  5. Methods of Creation • No particular language needed as long as settlor’s intent is clear. • Paraphrase § 112.035(a). • “The beneficiary’s interest shall be held subject to a spendthrift trust.” § 112.035(b).

  6. Exceptions to Enforceability • 1. Settlor = Beneficiary • Settlor cannot protect his/her own property from his/her creditors. § 112.035(d). • Booth – p. 88. • Many offshore and some states allows self-settled spendthrift trusts.

  7. Exceptions to Enforceability • 2. Necessaries • Not codified but some pre-Code cases may support this exception.

  8. Exceptions to Enforceability • 3. Child Support • Family Code § 154.004 • Court has discretion to “break” spendthrift protection for child support. • If distribution mandatory, up to mandatory amount. • If distribution discretionary, up to entire income. • Impact of exception. • Methods of drafting to avoid impact.

  9. Exceptions to Enforceability • 4. Federal Tax Claims

  10. Exceptions to Enforceability • 5. Compliance with agreement settling trust issues.

  11. Exceptions to Enforceability • 6. Other jurisdictions • Tort Claimants. • Always ineffective.

  12. Merger prevented -- § 112.034(c) • If settlor is not the beneficiary, merger will not occur with spendthrift trust. • Court will appoint new trustee to keep title split.

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