Trust Law/Level IV · Trusts that care/4.3 Protective arrangements/Lesson 2

Spendthrift trusts and the creditor wall

How a US spendthrift clause keeps a beneficiary’s creditors away from trust money, and where that protection stops.

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.

In Uniform Trust Code states, one phrase suffices: saying the interest is held subject to a ‘spendthrift trust’ restrains both transfers under §502 at no extra drafting cost; protection ends once money is paid out.
Under §504, creditors generally cannot force discretionary distributions; paying rent, tuition or providers directly keeps value inside the wall, since cash already received is reachable like any other money.
Pay mandatory distributions on time: under §506 a creditor may reach one not made within a reasonable time after it is due.
The wall does not stop everyone: in its uniform text, §503 lets child-support and spousal-support orders, and some government claims, reach distributions; check the governing state’s version, since Maine enacted none of these exceptions.
Own money gets no spendthrift protection under §505 except in domestic asset protection trust states such as Alaska, Delaware and Nevada; 11 U.S.C. §548(e) lets a bankruptcy trustee undo transfers made with intent to defraud within 10 years.

MaterialsA copy of the trust document you are reading, if you have one, to look for spendthrift wordingYour state’s versions of Uniform Trust Code §§502-506, if your state adopted the UTC (free on state legislature websites)A general list of the kinds of claims a beneficiary might face, such as consumer debt, a lawsuit or a support order (no personal details needed)

Wonder

Can a person protect their own money by putting it into a spendthrift trust for themselves?
Can a beneficiary’s former spouse collect support from trust money?
Can creditors reach money after it has been paid out?

Explore

In US states that adopted the Uniform Trust Code, a spendthrift clause protects a beneficiary’s interest from the beneficiary’s creditors. Under UTC §502, the clause is valid only if it restrains both voluntary and involuntary transfer, but it does not need elaborate wording: saying the interest is held subject to a ‘spendthrift trust’ is enough. A creditor or assignee then cannot reach the interest, or a distribution, before the beneficiary receives it. The wall protects a beneficiary’s interest in a trust someone else created; a settlor’s own money is treated differently.
The wall stops at the point of payment. Money the beneficiary has received belongs to them, and a creditor with a judgment can generally pursue it like other money in their account. UTC §506 adds a further limit: if the trustee does not make a mandatory distribution within a reasonable time after it is due, a creditor may reach it. So in practice the clause protects amounts still in the trust, and the timing and form of distributions affect what a creditor can reach.
The wall also has statutory gaps. In its uniform text, UTC §503 makes a spendthrift clause unenforceable against a beneficiary’s child, spouse or former spouse with 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 a state or the United States where a statute provides. Such a claimant may ask a court to attach distributions, and the court may limit the relief. States differ: Maine, for example, enacted none of these §503 exceptions, and some states added others.
Discretionary interests add a second layer. Under UTC §504, a creditor of a beneficiary generally cannot force a trustee to make a distribution that is subject to the trustee’s discretion, whether or not the trust has a spendthrift clause, even if the discretion is expressed as a standard such as health or support, and even if the trustee has abused the discretion. The model text has a support-order exception that some states, such as Maine, leave out. Once the trustee does pay, the money is the beneficiary’s and the usual rules apply.
Self-settled trusts are treated differently. Under UTC §505, a creditor of a settlor can reach the most the trustee could pay to or for the settlor from an irrevocable trust the settlor created for their own benefit, even with a spendthrift clause. A minority of states allow domestic asset protection trusts as an exception, beginning with Alaska and Delaware in 1997 and Nevada in 1999, each with its own conditions, and federal bankruptcy law (11 U.S.C. §548(e)) can reach some transfers to such trusts made within 10 years. These are a separate subject from family spendthrift trusts.
Jurisdiction matters throughout. In England and Wales, a restraint on alienation of a life interest is generally void, so English practice uses the protective trust instead (lesson 4.3.1). Within the US, each state’s version of §§502-506, its own exceptions and its court decisions decide what a creditor can reach, and the state whose law governs the trust can matter. Because these rules differ, many families have a lawyer in the relevant state review a draft. This lesson describes how the wall works; it does not suggest whether a clause suits any family.

Key facts

Under UTC §502, a spendthrift clause must restrain both voluntary and involuntary transfer; stating that the interest is held subject to a ‘spendthrift trust’ is enough.
Money already paid to a beneficiary is generally reachable by their creditors; under UTC §506, so is a mandatory distribution not paid within a reasonable time after it is due.
In its uniform text, UTC §503 lets a child, spouse or former spouse with a support order, a creditor who protected the beneficiary’s interest, and some government claims reach distributions; Maine enacted none of these.
Under UTC §504, a creditor generally cannot compel a discretionary distribution, even if the discretion is expressed as a standard.
Under UTC §505, a spendthrift clause does not protect a settlor’s own money in a trust for the settlor’s own benefit, except where a state’s domestic asset protection trust law provides otherwise.
In England and Wales, restraints on alienation of a life interest are generally void; protective trusts are used instead.

Exercise nine, six, three, one

9CollectList up to 9 kinds of claims a trust beneficiary might face (some lists are shorter), such as a credit card debt, a medical bill, a lawsuit, a support order, a tax debt or a business loan.

6ClusterSort them into 6 categories: ordinary creditors, support claims from a child, spouse or former spouse, government claims, claims by someone who protected the beneficiary’s interest, claims against money already paid out, and claims you are unsure about.

3DistillReduce the 6 categories to 3 groups: claims a spendthrift clause usually blocks under the uniform UTC, claims it usually does not, and claims that depend on your state’s version.

1CrystallizeWrite 1 sentence explaining why the same claim might be blocked while money is in the trust but reachable after it is paid out.

Fact check

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

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS