Understanding Spendthrift Provisions: Protection for Beneficiaries and Limitations
Spendthrift provisions are legal arrangements that prevent beneficiaries from transferring their future income or principal payments, while also protecting these assets from creditors. Designed to safeguard beneficiaries and ensure that trust property is used as intended by the settlor, these provisions only apply while the assets are in the trust. Once payments are made, beneficiaries can transfer rights, exposing them to creditor claims. Certain exceptions exist, such as for necessary expenses and child support. Understanding these nuances is crucial for effective estate planning.
Understanding Spendthrift Provisions: Protection for Beneficiaries and Limitations
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Presentation Transcript
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 • Protect beneficiary (asset protection). • Allow settlor to have trust property used as settlor intended. • Note: No requirement that beneficiary “needs” protection.
Time of protection • Interest protected only while in the trust. • Once trustee pays beneficiary, beneficiary may transfer and creditors may reach.
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).
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.
Exceptions to Enforceability • 2. Necessaries • Not codified but some pre-Code cases may support this exception.
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.
Exceptions to Enforceability • 4. Federal Tax Claims
Exceptions to Enforceability • 5. Compliance with agreement settling trust issues.
Exceptions to Enforceability • 6. Other jurisdictions • Tort Claimants. • Always ineffective.
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.
