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Spendthrift Provisions and How They Protect Your Heirs

Spendthrift provisions can be a helpful tool in making sure your beneficiaries are properly cared for when they inherit your estate. By including spendthrift provisions in your trust, your estate will be distributed under their terms. A spendthrift provision will also effectively protect your beneficiary’s inheritance from any creditors of the beneficiary, adding another layer of certainty and confidence to your estate plan.  

What Is a Spendthrift Provision?

A spendthrift provision is a trust provision that helps to protect a beneficiary’s inheritance by preventing creditors from attaching to it and by preventing the beneficiary from assigning their share to someone else. For example, if someone knows they are going to get $50,000 from a trust, with a spendthrift provision they cannot use that $50,000 that they do not yet have to get a line of credit. 

Simply put, the beneficiary cannot pledge the anticipated inheritance to another party in advance of receiving it. This helps to protect both the beneficiary and your assets. It also promotes responsible behavior by preventing the beneficiary from incurring more debt.

Spendthrift provisions can be included in either revocable or irrevocable trusts.  The spendthrift provision does not impact the purpose of the trust, but rather adds an extra layer of protection for a beneficiary. The spendthrift provision does not offer any extra protection for the grantor, per se, but it may be helpful knowing that an extra step was taken to further protect a beneficiary.

What Are the Benefits of a Spendthrift Provision?

You might be wondering, “If the beneficiary is going to receive a certain amount of money from the trust, why make them wait for it?” There are two main reasons.

Spendthrift provisions offer these benefits:

  1. They protect your assets from being taken by your beneficiary’s creditors.
  2. They curb any undesirable spending habits the beneficiary may have.  

With a spendthrift provision, the assets will be unreachable by the beneficiary’s creditors. The trust itself owns the assets and the spendthrift provision makes the beneficiary’s present and future interests in those assets unassignable.  For example, say you want to leave John, your heir, $100,000. You also know that John has a debt of $100,000. If you do not want your hard-earned assets to be immediately seized from John by his creditors, a spendthrift provision will protect John’s share from creditors as long as he keeps the inheritance in the trust.  

The other benefit of spendthrift provisions is they can help to restrict distribution to a beneficiary as you, the grantor, see fit. One way you can do this is by giving the trustee the power to give the beneficiary money for necessary expenses such as health expenses, education, and maintenance expenses. Another way you can go about this is to require that the beneficiary become a hard-working and productive member of society in order to get their inheritance.  

The decision as to whether the beneficiary has met these necessary criteria falls to the trustee.  You may provide guidelines for the trustee, and the trustee’s job will be to adhere to those guidelines as they believe you would have wanted. For example, if you want the beneficiary to improve their work ethic before they get their inheritance, then it is up to the trustee to determine if that guideline has been met. After evaluating the circumstances and considering the goal you desired, the trustee will ultimately distribute – or withhold – the inheritance.  

How Do Spendthrift Provisions Work?

Spendthrift provisions work by shielding the beneficiary’s inheritance from creditors while the inheritance stays in the trust. In the event that there are any outstanding debts or judgments against the beneficiary, the creditor cannot attach to the assets that the beneficiary has not yet received from the trust. Once the beneficiary pulls the asset out of the trust, however, the creditors will be able to stake a claim against those assets.  

Spendthrift provisions have specific language that says the beneficiary may not transfer or assign their inheritance while it is in the trust, and that no one can stake a claim against the beneficiary’s interest in the trust. This ensures that the beneficiary’s inheritance remains safe while in the trust.

Assigning Terms to a Spendthrift Provision

There are many reasons why you may want to include a spendthrift provision in your trust.  These provisions are most useful if you have a concern over what a beneficiary will do with their inheritance money. After all, if you have worked hard your whole life to build your estate, it is reasonable that you would want your heirs to put your assets to good use.

The terms will explicitly state that no one other than the beneficiary has a right to be assigned the beneficiary’s share. The terms will prohibit the beneficiary from being able to transfer their assets while also preventing creditors from staking a claim against beneficiary’s share while it is still in the trust. If you believe that you may be interested in including a spendthrift provision in a trust, we recommend speaking with an estate planning attorney at Rosenblum Law.

New Jersey Law on Spendthrift Provisions

New Jersey Uniform Trust Code does not include an exception that allows certain creditors to pierce a spendthrift provision. While other states do have these exceptions, New Jersey does not.  This means that New Jersey offers even more protection via spendthrift provisions than many other states.  

So called “exception creditors” are specific types of creditors that can get access to assets covered by a spendthrift provision. Those types of creditors include, but are not limited to, mandatory child support for the beneficiary’s child or spousal support. A court order could still be strong enough to pierce the protection of a spendthrift provision, but New Jersey does not have any such exceptions carved out in its laws. 

Would a Spendthrift Provision Help Your Beneficiaries?

A spendthrift provision will help beneficiaries who may be unable to make appropriate financial decisions for themselves. By including this provision, you can help to shield your beneficiary from their creditors while also promoting healthy spending habits once they get their inheritance.  Spendthrift provisions are especially beneficial when you know a beneficiary has a certain amount of debt, or if you believe they should reach a certain level of maturity before receiving the funds. These are both common concerns for people when creating their estate plans.  

If you share these concerns and want to ensure that the assets left to your heirs are put to good use, then a spendthrift provision may be right for you. With a spendthrift provision you can have peace of mind knowing that your assets and beneficiaries are protected.  At Rosenblum Law, our experienced estate planning attorneys can help to guide you through this process. For a free consultation to discuss this or any other estate planning matter, call us at 888-235-9021. 

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