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As you work through the estate planning process, you may wish to consider whether the assets of the trust are protected from your beneficiaries’ potential creditors—ex-spouses in the event of a divorce, creditors involved in a bankruptcy proceeding, or the claimant in a lawsuit. Fortunately, there are steps that you can take to prevent creditors from depleting the assets of your trust. One such method for doing so is to use a spendthrift provision in the trust document. This provision protects trust assets because the trustee of the trust retains control over the property—even after you have passed away.
Does this sound appealing to you? Happily, with an experienced attorney drafting your estate plan, it is not difficult to include this feature.
Conditions for an Effective Spendthrift Trust Provision
Generally, for a spendthrift provision to work, the following six conditions must be met:
- The trustee has total control over how the trust funds are spent. However, you can indicate that they must be used for the benefit of the beneficiary.
- The beneficiary does not have any ownership of the trust assets.
- The beneficiary cannot demand that the trustee make distributions to him.
- The trust instrument itself contains language that you intended the trust to be treated as a spendthrift trust.
- The creditor was not providing a basic life necessity, such as food or shelter.
- The creditor is not a child or spouse who is entitled to support payments.
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