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Trust Law/Level III · Family trusts/3.2 Trusts made by will/Lesson 6

Spendthrift clauses for family

What a spendthrift clause in a US family trust does, where its protection stops, and why English law works differently.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. In UTC states one sentence is enough: stating that the interest is held subject to a ‘spendthrift trust’ (UTC §502) protects undistributed amounts at almost no drafting cost. Catch: support-order claimants and some government claims can still reach distributions (§503), varying by state.
  2. Pair the clause with discretionary distributions so nothing is due and reachable (UTC §504). Catch: under §506, a mandatory distribution left unpaid beyond a reasonable time becomes reachable by creditors.
  3. Money paid out is the beneficiary’s own and reachable, so paying bills directly to providers keeps the rest inside the protection. Catch: the trust terms must permit direct payments, and the trustee still owes impartial, good-faith administration.
  4. The clause cannot shelter your own money in a trust for yourself (UTC §505); in England and Wales, use the statutory protective trust (Trustee Act 1925 s.33) instead. Catch: there the life interest ends on bankruptcy, then income becomes discretionary.

MaterialsA draft or copy of the family trust you are thinking about, if you have oneYour state’s trust code sections on spendthrift provisions; in Uniform Trust Code states, its versions of UTC §§502-506 (free on state legislature websites)A general sense of the risks your beneficiaries may face, such as debts, lawsuits or divorce (no personal details needed)

Wonder

  1. Can my child’s ex-spouse take money from the trust?
  2. What happens if I pay out cash to my child?
  3. Why doesn’t this work in England?

Explore

  1. In the United States, a spendthrift clause is a term in a trust that stops a beneficiary from selling, giving away or pledging future payments, and stops the beneficiary’s creditors from reaching them. Under Uniform Trust Code §502 (2000), the clause is valid only if it restrains both voluntary and involuntary transfers, and saying the interest is held subject to a ‘spendthrift trust’ is enough. A creditor or assignee then cannot reach the beneficiary’s interest, or a distribution, before the beneficiary receives it. The protection comes from the clause and state law, not from the trust structure alone.
  2. The protection has limits. In its uniform text, UTC §503 makes a spendthrift clause unenforceable against a beneficiary’s child, spouse or former spouse who has a judgment or court order for support or maintenance; against a creditor who provided services to protect the beneficiary’s interest in the trust; and against claims of the state or the United States where a statute provides. Such a claimant may ask a court to attach present or future distributions, and the court may limit the relief. States differ widely: some enacted fewer exceptions or none of these, and others added more.
  3. Once money is paid out, the clause no longer protects it. A distribution the beneficiary has received belongs to them, and their creditors can generally reach it like any other money in their account. The clause protects the interest while it is still in the trust. UTC §506 adds a further limit: if the trustee does not make a required (mandatory) distribution within a reasonable time after it is due, a creditor may reach it. So the clause mainly guards amounts not yet paid, especially where the trustee has discretion over when to pay.
  4. In England and Wales, a clause that simply forbids a beneficiary to dispose of a life interest, or shields it from creditors, is generally void; this goes back to Brandon v Robinson (1811). English practice uses the protective trust instead. Under section 33 of the Trustee Act 1925, the beneficiary has a life interest that ends automatically on bankruptcy or an attempt to dispose of it; the income is then held on discretionary trust for the beneficiary and their family. Lesson 4.3.1 covers protective trusts in more detail.
  5. Spendthrift clauses are often considered where a beneficiary may face lawsuits, business debts or divorce, but they do not cover everything. In UTC states that keep §503, a former spouse with a support order is an exception, so the answer to ‘can my child’s ex-spouse take money from the trust?’ may not be a simple no. Federal tax claims can also reach some interests where federal law provides. And under UTC §505, a person cannot use a spendthrift clause to shield their own money in a trust they created for themselves.
  6. The wording itself can be short: under UTC §502, stating that the beneficiary’s interest is held subject to a ‘spendthrift trust’ is enough in states that follow it. What matters more is how the clause fits the rest of the trust, such as whether distributions are discretionary or mandatory, and which state’s law governs. Because exceptions and court decisions differ by state, many families have a lawyer in their state review a draft. This lesson describes the rules; it does not suggest whether a clause suits your family.

Key facts

  • Under UTC §502, a spendthrift clause is valid only if it restrains both voluntary and involuntary transfer; creditors cannot reach the interest or a distribution before the beneficiary receives it.
  • Under the uniform text of UTC §503, a beneficiary’s child, spouse or former spouse with a support order can ask a court to attach distributions; states vary.
  • Money already paid to the beneficiary is generally reachable by the beneficiary’s creditors.
  • In England and Wales, restraints on alienation of a life interest are generally void; protective trusts under Trustee Act 1925 s.33 are used instead (lesson 4.3.1).
  • Under UTC §505, a spendthrift clause does not protect a settlor’s own money in a trust the settlor created for their own benefit.
  • Under UTC §506, a creditor may reach a mandatory distribution the trustee has not paid within a reasonable time after it was due.

Exercise nine, six, three, one

9CollectList up to 9 risks your family members might face over the next ten years (some families have fewer), such as business failure, divorce, lawsuits, medical bills or tax debts.
6ClusterSort them into 6 categories: ordinary creditors, support claims from a spouse or child, government claims, the beneficiary’s own spending, risks to money already paid out, and risks you are unsure about.
3DistillReduce the 6 categories to 3 groups: risks a spendthrift clause usually addresses in UTC states, risks it usually does not, and risks that depend on your state’s law.
1CrystallizeWrite 1 sentence describing how protection differs for money still held in the trust and money already paid to the beneficiary.

Fact check

Dates, figures and claims checked against the published sources listed below.

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